BUSINESS  ADMINISTRATION 


The  texts  listed  on  this  page  form  the  basic  material  for  the 
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constitute  a  library  of  standard  practice  in  all  the  important 
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Titles  Authors 

BUSINESS  PSYCHOLOGY  .    HUGO  MUNSTERBERG,  Ph.D.,  M.D.,  LL.D. 

Harvard   University 

PERSONAL  EFFICIENCY,  AP- 
PLIED SALESMANSHIP, 
AND  SALES  ADMINISTRA- 
TION .........  IRVING  R.  ALLEN 

Sales  Counselor 

BUSINESS  LAW  I  .....  r 

BUSINESS  LAW  II        ...      A      A^mber  of  thTnhnois  Bar 


BUSINESS  ENGLISH       .     .     .     EDWIN  HERBERT  LEWIS,  Ph.D.,  LL.D. 

Lewis  Institute,  Chicago 

BUSINESS  ECONOMICS      .     .     ERNEST  LUDLOW  BOGART,  Ph.D. 

University  of  Illinois 

INDUSTRIAL  ORGANIZA- 
TION AND  MANAGEMENT  .     HUGO  DIEMER,  M.E. 

Pennsylvania   State   College 

MONEY  AND  BANKING      .     .     HENRY  PARKER  WILLIS,  Ph.D. 

Secretary,  Federal  Reserve  Board 

INVESTMENTS  AND   SPECU- 

LATION         ......       .       LOUIS    GUENTHER 

Editor,   "Financial   World" 

ORGANIZING  A  BUSINESS     .     MAURICE  H.  ROBINSON,  Ph.D. 

University  of  Illinois 

FINANCING  A  BUSINESS  .     .     ELMER  H.  YOUNGMAN 

Editor,  "Bankers  Magazine" 

ADVERTISING   ......     E.  H.  KASTOR 

H.  W.  Kastor  &  Sons 

RETAIL  MERCHANDISING     .     PAUL  NEYSTROM,  Ph.D. 

University  of  Minnesota 

EDWARD  M,  SKINNER 


CREDITS  AND  COLLEC- 


TIONS 


Manager,  Wilson  Bros. 

R.  S.  WHITE 

American  Steel  &  Wire  Co. 

H.  E.  KRAMER 


RAILWAY   REGULATION     .    .     I.  L.  SHARFMAN,  A.B.,  LL.B. 

University  of  Michigan 

OCEAN  TRAFFIC  AND 
TRADE B.  OLNEY  HOUGH 

Editor,  "American  Exporter" 

ACCOUNTING HENRY  PARKER  WILLIS,  Ph.D. 

OFFICE  ORGANIZATION  AND 
MANAGEMENT    .     .     .     .     .     C.  C.  PARSONS 

Manager,  Shaw-Walker  Co. 


LASALLE  EXTENSION  UNIVERSITY 


RAILWAY  REGULATION 


AN  ANALYSIS  OF  THE  UNDERLYING  PROBLEMS 
IN    RAILWAY    ECONOMICS    FROM    THE 
STANDPOINT  OF  GOVERNMENT 
REGULATION 


I.  LEO  SHARFMAN,  A.B.,  LL.B. 

Professor  of  Political  Economy,  University  of  Michigan 

Sometime  Chief  Investigator,  Department  on  Regulation  of  Interstate 

and  Municipal  Utilities,  The  National  Civic  Federation 


La  Salle  Extension  University 
Chicago 

1915 


Copyright,  1915 
LASALLE  EXTENSION  UNIVERSITY 


PREFACE 

In  the  following  pages  an  attempt  is  made  to  present 
an  analysis  of  the  leading  problems  in  railway  economics 
from  the  standpoint  of  government  regulation  in  the 
United  States.  While  it  has  been  my  purpose  to  vitalize 
the  discussion  by  the  liberal  use  of  concrete  illustrative 
material,  the  emphasis  throughout  has  been  placed  upon 
the  discovery  of  underlying  causes  and  the  consideration 
of  fundamental  principles. 

The  historical  development  of  railway  transportation 
has  been  traced  only  in  so  far  as  early  conditions  and 
past  events  have  been  shown  to  throw  light  upon  the 
meaning  and  significance  of  current  practices  and  present- 
day  problems.  The  various  stages  in  the  growth  of  the 
American  system  of  public  control,  state  and  national, 
have  been  given  careful  and  detailed  consideration  be- 
cause the  principles  and  methods  of  railway  regulation, 
as  applied  in  the  United  States  today,  are  the  result  of 
a  gradual  development.  Both  legislative  enactment  and 
judicial  decision  have  slowly  accommodated  themselves 
to  the  irresistible  pressure  of  our  changing  social  and 
political  ideals  and  our  expanding  commercial  and  indus- 
trial needs. 

The  vital  and  inseparable  relationship,  in  railway 
transportation,"  between  legal  rules  and  business  welfare, 
between  railway  economics  and  railway  regulation,  has 
served  as  the  source  and  foundation  of  the  entire  analysis 

iii 

336775 


iv  Preface 

and  discussion.  The  ideal  of  railway  regulation  is  to 
harmonize,  as  far  as  possible,  the  natural  functioning 
of  railway  enterprise  with  the  principles  and  practices 
of  public  control. 

The  various  sources,  primary  and  secondary,  upon 
which  chief  reliance  has  been  placed  in  the  preparation 
of  this  text  are  indicated  in  detail  in  the  course  of  the 
pages  that  follow.  Special  acknowledgement  must  here 
be  made  to  Professor  William  Z.  Ripley,  of  Harvard 
University,  for  his  help  and  influence  both  as  teacher 
and  writer,  and  to  the  late  Professor  Harrison  S.  Smalley, 
of  the  University  of  Michigan,  whose  volume  on  Trans- 
portation in  the  United  States,  published  by  the  LaSalle 
Extension  University,  was  placed  freely  at  my  disposal. 
I  am  also  indebted  to  Mr.  Asa  Colton  for  reading  both 
manuscript  and  proof  and  making  many  helpful  sug- 
gestions. 

I.  L.  S. 

Ann  Arbor,  Michigan, 
August,  1915. 


CONTENTS 


I.     THE  EXTENT  AND  IMPORTANCE  OF  RAILWAY  TRANS- 
PORTATION 

The  Extent  of  American  Railway  Interests. .  1 

The  Significance  of  Railway  Transportation. .  3 

Railway  Regulation    8 

II.    THE  PROBLEM  OF  REGULATION 

Historic  Foundations  for  Governmental  Control  10 

The  Legal  Basis  of  Regulation 12 

The  Economic  Basis  of  Regulation 17 

The  Problem  of  Regulation 25 

III.  AMERICAN  RAILWAY  DEVELOPMENT 

The  Development  of  Railway  Transportation . .  29 

Public  Aid  to  Railway  Construction 35 

The  Speculative  Character  of  American  Rail- 
way Development 39 

The  Beginnings  of  Regulation 42 

IV.  RAILWAY  COMPETITION 

The  Nature  of  Railway  Competition 49 

The  Forms  of  Railway  Competition. ._ 51 

Railway  Co-operation  and  Consolidation 53 

The  Legal  Validity  of  Co-operative  Effort 57 

Government  Regulation  and  Railway  Co-oper- 
ation . .'. 60 

V.    THE  THEORY  AND  PRACTICE  OF  RATE-MAKING 

Rates   and  Regulation 64 

Theories  of  Rate-Making 65 

Rate-Making  Practice  77 

The  Reasonableness  of  Rates 83 

VI.     THE  REGULATION  OF  RAILWAY  RATES 

The  Rate-Fixing  Power  of  the  States 87 

The  Development  of  Federal  Rate  Regulation  90 

The  Doctrine  of  Judicial  Review 95 

The  Basis  of  Rate  Reasonableness 100 

v 


vi  Contents 

VII.     RAILWAY  DISCRIMINATION 

The  Causes  of  Railway  Discrimination 112 

The  Nature  of  Discriminatory  Practices 114 

The  Forms  of  Railway  Discrimination 118 

The  Law  Against  Discrimination. , 132 

Pooling  and  Discrimination 137 

VIII.     REGULATION  BY  THE  STATES 

The  Methods  of  State  Regulation 139 

The  Scope  of  Railroad  and  Utility  Legislation.  143 

The  Organization  of  Commissions 144 

The  General  Extent  of  Commission  Authority  150 

The  Regulation  of  Franchises 154 

The  Regulation  of  Security  Issues 157 

The  Regulation  of  Rates  and  Service 158 

The  Regulation  of  Accounts  and  Reports 163 

State  Versus  Federal  Regulation 165 

List  of  State  Railroad  and  Public  Service  Com- 
missions      166 

IX.     THE    CONFLICT    BETWEEN    STATE    AND    FEDERAL 
AUTHORITY 

Distribution  of  Power  Between  the  Nation  and 

the  States   172 

Intrastate  and  Interstate  Commerce 174 

Judicial  Interpretation  of  the  Commerce  Clause  175 

Federal  Control  Over  Intrastate  Rates 178 

The  Present  Status 186 

X.    FEDERAL  REGULATION 

The  Causes  of  Federal  Regulation 188 

Its  General  Character 191 

The  Act  to  Regulate  Commerce 193 

The  Elkins  Act 201 

The  Hepburn  Act 202 

The  Mann-Elkins  Act 216 

Conclusion     219 

NOTE  ON  SOURCE  MATERIAL 223 

SELECTED  BOOKS 224 

INDEX  ,  .  227 


RAILWAY  REGULATION 

CHAPTER  I 

THE  EXTENT  AND  IMPORTANCE  OF  RAILWAY 
TRANSPORTATION 

THE  EXTENT  OF  AMEBICAN  KAIL  WAY  ISTTEBESTS 

A  discussion  of  the  problems  of  railway  regulation  in 
the  United  States  may  well  begin  with  a  statement  of  the 
extent  of  the  railway  interests  to  be  regulated.  Some 
conception  of  the  magnitude  of  these  interests  may  be 
obtained  by  a  consideration  of  the  extent  of  mileage,  the 
amount  of  equipment,  the  number  of  employees  engaged 
in  the  service,  the  amount  of  outstanding  securities  rep- 
resenting capital  invested,  the  number  of  passengers  and 
tons  of  freight  carried,  the  revenues  accruing  from  the 
service,  the  expenditures  involved  in  rendering  it,  and 
the  earnings  distributed  annually  as  a  result  of  railway 
enterprise. 

There  are  about  250,000  miles  of  line  in  the  United 
States,  representing  only  single-track  mileage.1  If  we 
include  the  length  of  second,  third,  and  fourth  tracks, 
and  the  mileage  of  yard  tracks  and  sidings,  the  total 
mileage  operated  in  the  United  States  in  1914  was  377,102. 

1  The  figures  that  follow  are  taken  from  Statistics  of  Railways  in  the 
United  States  for  the  year  ending  Jun£  30,  1914.  The  single-track  mileage 
as  of  that  date  was  247,397. 

1 


2  Eailway  Regulation 

The  significance  of  this  vast  mileage  is  strikingly  empha- 
sized by  Professor  W.  Z.  Eipley  as  follows : 

The  total  mileage  of  the  United  States  is  nearly  equal  to  a 
ten-track  railroad  completely  encircling  the  globe.  The  United 
States  had  already  in  1900  about  forty  per  cent  of  the  aggregate 
mileage  of  all  the  countries  of  Europe  combined.  *  *  *  Pro- 
portionately to  population  the  United  States  is  about  six  times 
as  well  equipped  with  railroads  as  Europe.  Similar  results 
appear  with  reference  to  superficial  area.  As  compared  with 
Europe  alone,  we  have  about  two-thirds  as  much  mileage  to  every 
square  mile  of  territory,  despite  the  fact  that  our  density  of 
population  is  only  about  one-seventh  of  that  of  Austria-Hungary 
— the  most  sparsely  populated  country  in  Europe.2 

The  figures  for  equipment  are  equally  stupendous. 
There  were,  in  1914,  64,760  locomotives  and  2,503,822  cars 
devoted  to  the  service  rendered  by  American  railways. 
The  number  of  employees  was  1,695,483 — the  largest  num- 
ber of  wage-earners  engaged  in  any  single  American  in- 
dustry with  the  exception  of  agriculture.  The  outstanding 
securities  amounted  to  $20,247,301,257,  representing  an 
apparent  investment  in  railway  transportation  which  is 
likewise  second  only  to  agriculture.3  The  number  of  pas- 
sengers carried  during  the  year  1910  earning  revenue  for 
the  railroads  was  971,683,199;  the  number  of  tons  of 
freight  hauled  during  the  same  year  earning  revenue  for 
the  railroads  was  1,849,900,101.  If  we  take  distance  into 
consideration  and  determine  the  number  of  passengers  as 
well  as  the  number  of  tons  of  freight  carried  one  mile, 
the  figures  become  so  large  as  to  pass  beyond  human  con- 

2W.  Z.  Eipley,  Railroads:  Sates  and  Regulation,  34-35. 
For  a  statistical  comparison  of  railway  conditions  in  the  United  States 
and  in  European  countries,  see  Bulletin  No.  24  (1911)  of  the  Bureau  of 
Eailway  Economics  (Washington,  D.  C.)  on  Comparative  Eailway  Statistics 
of  the  United  States,  the  United  Kingdom,  France,  and  Germany. 

s  These  figures  are  based  on  the  Interstate  Commerce  Commission  statis- 
tics for  carriers  having  an  operating  revenue  above  $100,000  per  year  for 
the  year  ending  June  30,  1914. 


Importance  of  Railway  Transportation  3 

ception.  The  number  of  passengers  carried  one  mile  in 
1912  was  33,132,354,783,  and  the  number  of  tons  of  freight 
carried  one  mile  was  264,080,745,058.4  The  revenues 
from  operation  amounted  to  $2,842,695,382 ;  the  operating 
expenditures  were  $1,972,415,776;  and  the  net  operating 
revenue  for  the  same  year  was  $870,279,606.  The 
immensity  of  these  figures  must  be  apparent  to  every  one. 
and  no  further  comment  is  necessary  to  indicate  the  vast 
extent  of  American  railway  interests. 

THE  SIGNIFICANCE  OF  RAILWAY  TRANSPORTATION 
ITS  GENERAL  INFLUENCE 

But  the  significance  of  railway  transportation  cannot 
be  measured  by  the  mere  extent  of  mileage  or  equipment, 
or  by  the  mere  magnitude  of  business  operations.  The  rail- 
road has  without  doubt  introduced  the  most  important  of 
modern  industries,  and  the  development  of  railway  trans- 
portation has  revolutionized  the  very  foundations  of  life. 
It  has  completely  transformed  our  industrial,  commercial, 
and  social  relations;  and  it  has  provided  the  strongest 
external  force  for  the  permanent  unification  of  our 
national  life. 

When  the  application  of  steam  to  transportation  was 
practically  established  and  American  energy  set  itself  to 
the  task  of  railway  development,  the  old  methods  and  the 
old  conditions  in  almost  every  walk  of  life  gradually  dis- 

*  A  ton  of  freight  carried  a  distance  of  one  mile  is  given  the  traffic 
denomination  of  one  "  ton  -mile. "  If  a  freight  train  carries  fifty  tons  of 
freight  on  its  trip  from  A  to  B,  a  distance  of  100  miles,  it  performs  a  traf- 
fic service  of  50  times  100  or  5,000  ton-miles.  In  the  same  way  a  passen- 
ger carried  one  mile  represents  a  traffic  unit  of  one  ''passenger-mile." — 
Julius  H.  Parmelee,  Statistics  of  Freight  Traffic. 


4  Railway  Regulation 

appeared.    Mr.  B.  H.  Meyer  has  aptly  described  these 
changes  in  the  following  words : 

The  pack-horse,  the  stage-coach,  and  the  country  tavern,  and 
all  that  goes  with  these,  were  soon  superseded  by  other  agencies 
better  adapted  to  meet  the  new  conditions  of  life.  Limitless 
areas  were  transformed  into  fruitful  farms,  and  the  railways 
themselves  became  objects  of  wealth  in  the  land  whose  value  they 
had  helped  to  create.  The  isolated  settler  was  placed  in  touch 
with  the  world ;  and  his  wants,  no  longer  dependent  upon  garden, 
or  farm,  or  local  market,  could  draw  for  their  satisfaction  upon 
the  storehouses  of  the  earth.  The  merchant's  bazaar  henceforth 
could  offer  commodities  produced  under  many  flags,  and  the  man 
of  learning  exchanged  ideas  with  scholars  the  world  over.  Inter- 
national unions — scientific,  literary,  industrial,  and  political  even 
— sprang  up  in  quick  response  to  the  throbbing  of  the  larger  life. 
The  "bonds  of  consanguinity"  concerning  which  earlier  Ameri- 
can statesmen  expressed  so  much  solicitude,  could  now  be  pre- 
served indissolubly  among  all  sections  of  our  country.  The  gov- 
ernment became  omnipresent  and  the  law  omnipotent.  Such  was 
the  revolution  caused  by  the  railway.5 

ITS   ECONOMIC   FUNCTIONS 

It  is  a  commonplace  of  economics  that  production  con- 
sists in  the  creation  of  utilities,  in  the  endowment  of 
matter  with  the  quality  or  capacity  of  satisfying  human 
wants.  Primarily,  matter  is  made  more  useful  for  pur- 
poses of  consumption  by  a  change  in  its  form;  as  when 
a  quantity  of  lumber,  for  example,  is  turned  into  a  house- 
ful of  furniture.  But  commodities,  even  in  their  final 
consumable  form,  may  be  rendered  more  useful  by  being- 
made  available  at  the  place  where  they  are  wanted.  The 
railway,  in  transporting  a  carload  of  furniture  from 
Grand  Eapids  to  New  York,  is  creating  utilities  no  less 
truly  than  the  manufacturer  who  transformed  the  raw 
material  into  the  finished  product;  and  those  who  are 
engaged  in  transportation  are  participating  vitally  in  the 

e  B,  H.  Meyer,  Eailway  Legislation  in  the  United  States,  4,  5. 


Importance  of  Railway  Transportation  5 

productive  process  of  the  community.  This  creation  of 
place  utility  by  the  transportation  industries  extends  to 
the  thousands  of  commodities  each  day  offered  for  car- 
riage on  our  American  railways. 

In  a  more  fundamental  sense,  the  economic  function  of 
railway  transportation  consists  in  furthering  the  geo- 
graphical or  territorial  division  of  labor.  Industries 
become  established  in  the  localities  which  afford  the  most 
advantageous  conditions,  and  low  rates  of  transportation 
enable  the  consumers  in  all  parts  of  the  country  to  enjoy 
the  benefits  of  cheapened  production.  In  widening  the 
market  for  the  products  of  industry,  the  railway  creates 
the  conditions  essential  to  large-scale  production  and  the 
development  of  a  minute  division  of  labor.  In  this  man- 
ner it  brings  to  the  productive  process  the  well-known 
economies  of  specialized  machinery  and  labor-saving 
devices.  The  fundamental  advantages  of  our  modern 
factory  system  are  dependent  upon  an  extensive  market, 
and  the  extent  of  the  market  is  very  largely  determined 
by  progress  in  transportation.  For  a  more  detailed  con- 
sideration of  the  relation  between  the  development  of 
transportation  and  the  effective  employment  of  the  divi- 
sion of  labor,  compare  the  following :  6 

Progress  in  indirect  cooperation,  or  the  division  of  labor, 
depends  upon  the  development  of  markets  and  other  facilities 
for  exchange.  For  example,  a  man  cannot  be  a  shoemaker 
unless  shoes  are  in  demand  by  people  willing  and  able  to  pay 
for  them.  Much  less  can  a  shoe  factory  be  organized,  with  its 
elaborate  subdivision  of  tasks  and  large  output,  unless  shoes 
can  be  sold  at  remunerative  prices.  From  this  it  may  be  inferred 
that  every  improvement  tending  to  widen  the  market  for  goods 
is  favorable  to  a  further  extension  of  the  division  of  labor.  The 

eH.  B.  Seager,  Introduction  to  Economics  (3d  ed.),  137-138. 


6  Railway  Regulation 

truth  of  this  conclusion  is  abundantly  illustrated  by  the  history 
of  the  last  one  hundred  years. 

Before  the  era  of  steam  railways  and  steam  vessels,  the  market 
for  most  products  was  necessarily  restricted  to  limited  areas 
near  the  source  of  supplies  because  of  the  high  cost  of  trans- 
portation. Each  region  had  to  produce  for  itself  its  bulkier 
food  articles,  building  materials,  and  implements,  and  could  im- 
port from  or  export  to  other  regions  only  those  products  which 
were  light  and  costly.  Under  these  circumstances  the  division 
of  labor  could  be  little  practiced.  Country  districts  afforded 
employment  to  a  blacksmith,  a  carpenter,  and  a  few  other  spe- 
cialists. A  few  cities  grew  up  where  those  goods  which  could 
pay  the  relatively  high  costs  of  transportation  were  manufac- 
tured. But  the  majority  of  the  people  were  forced  by  the  con- 
ditions to  give  their  attention  to  agriculture  as  the  only  means 
by  which  they  could  earn  a  living.  Steam  and,  more  recently, 
electrical  transportation  have  changed  this  situation.  At  pres- 
ent the  cost  of  carriage  offers  no  serious  obstacle  to  the  shipment 
of  even  cheap  and  bulky  articles,  such  as  wheat  and  coal,  half- 
way round  the  world.  For  most  goods,  in  place  of  a  merely 
local  market,  there  are  now  general  markets  ranging  in  magni- 
tude from  that  afforded  by  a  large  city  to  that  of  the  whole 
world.  Perishable  goods,  services,  and  goods  for  which  there 
is  only  a  local  demand,  must  still  be  produced  on  a  small  scale  to 
satisfy  local  requirements,  but  the  proportion  of  these  goods  to 
the  whole  mass  of  products  is  constantly  diminishing.  Even 
fruit  and  fresh  meat  have  ceased  to  be  perishable  in  the  sense 
that  they  will  not  bear  transportation  to  distant  markets.  Ac- 
companying this  widening  of  markets,  there  has  been  a  concentra- 
tion of  special  industries  in  special  localities  and  of  business  man- 
agement in  fewer  and  fewer  hands.  In  this  way  full  advantage 
has  been  taken  of  opportunities  for  extending  the  division  of 
labor,  with  the  result  that  the  volume  of  goods  produced  has  enor- 
mously increased. 

These  conditions  clearly  show  the  absolute  depend- 
ence of  modern  production  upon  an  adequate  transpor- 
tation system. 


Importance  of  Railway  Transportation  7 

ITS  SOCIAL  AND  POLITICAL  IMPORTANCE 

In  its  social  and  political  aspects  the  railway  has 
strengthened  the  unity  of  the  American  people.  It  is 
indisputable  that  our  highly  developed  system  of  railway 
transportation  has  contributed  very  largely  to  unifying 
into  a  single  community  of  remarkable  cohesion  the  one 
hundred  millions  of  people  scattered  over  the  vast  area  of 
the  United  States.  A  healthy  local  pride  clearly  exists 
today,  as  it  always  must  exist  if  each  unit  of  the  national 
realm  is  to  contribute  most  effectively  to  the  common  life ; 
but  sectionalism  of  the  sort  which  overemphasizes  the 
local  unit  cannot  withstand  the  cementing  vigor  of  a 
highly  developed  transportation  system.  Closely  akin  to 
this  gain  in  social  unity  has  been  the  growth  in  political 
influence  and  efficiency.  The  American  frontier  was 
pushed  farther  and  farther  to  the  westward,  and  the 
desert  plains  and  highlands  were  transformed  into  busy 
centers  of  social  and  commercial  activity.  Through 
progress  in  transportation  representative  government  on 
a  large  scale  was  made  practicable. 

It  is  to  be  remembered,  however,  that  the  railway  has 
been  an  important  factor  in  bringing  to  the  forefront  the 
social  problems  that  have  accompanied  our  industrial 
growth.  The  industrial  changes  of  the  last  century  have 
come  in  no  small  measure  through  the  instrumentality  of 
the  railway  (although  it  was  itself  a  natural  outcome  of 
the  industrial  revolution),  so  that  the  railway  has  helped 
to  intensify  the  social  problems  which  these  changes  have 
brought.  These  problems  are  bound  up  with  the  transi- 
tion from  the  domestic  to  the  factory  system  of  produc- 
tion. They  involve  the  substitution  of  the  factory  hand 
for  the  independent  workman,  the  growth  of  classes  with 
their  threatening  conflicts,  and  the  exploitation  of  women 


8  Railway  Regulation 

and  children  in  industry.  The  remarkable  development 
of  large  cities,  with  their  corrupting  and  stifling  surround- 
ings, at  the  expense  of  the  more  wholesome  country  life, 
has  been  one  of  the  most  pronounced  results  of  this  won- 
derful expansion.  But  these  social  problems,  which  are 
made  acute  by  progress  in  transportation,  are  of  the  very 
nature  of  our  modern  industrial  system.  On  the  whole 
our  social  unity  and  political  welfare  have  been  immeas- 
urably strengthened  and  enriched  by  the  development  of 
railway  transportation. 

RAILWAY   REGULATION 

In  view  of  the  vital  importance  of  railway  transporta- 
tion to  the  welfare  and  development  of  this  country,  it  is 
very  evident  that  the  service  should  be  so  conducted  as 
to  serve  the  best  interests  of  all  branches  of  commerce 
and  industry  and  of  the  people  as  a  whole.  It  will  be 
seen,  however,  in  a  later  chapter,  that  almost  from  the 
beginning  of  transportation,  it  has  been  found  necessary 
to  regulate  the  operation  of  transportation  agencies,  be- 
cause these  agencies,  if  left  to  themselves,  do  not  develop 
their  activities  in  such  a  way  as  to  promote  the  public 
welfare.  It  is  to  analyze  the  chief  problems  in  railway 
economics  and  to  trace  the  development  of  railway  regu- 
lation in  this  country  that  this  text  has  been  prepared. 

In  studying  the  succeeding  chapters,  the  reader  should 
bear  in  mind  that  the  present  conduct  of  American  rail- 
ways had  its  origin  in  the  earliest  conditions.  Some 
acquaintance,  therefore,  with  the  historical  development 
of  railway  transportation  and  with  the  gradual  growth  of 
the  problems  and  principles  of  railway  regulation  is  of 
very  great  value  to  the  student  of  transportation  who 
realizes  that  he  must  often  know  the  origin  of  practices 


Importance  of  Railway  Transportation  9 

and  conditions  in  order  to  appreciate  fully  their  present 
character  and  importance. 

TEST  QUESTIONS 

1.  Give  briefly  figures  indicating  the  extent  of  the  railway  busi- 
ness in  the  United  States  at  the  present  time. 
'    2.  Show  the  economic  functions  of  transportation. 

3.  How  have  the  railroads  aided  in  the  development  of  Ameri- 
can business? 

4.  In  what  way  does'the  American  railway  system  increase  the 
unity  of  the  American  people? 

5.  Why  has  it  been  found  necessary  to  regulate  the  operation 
of  transportation  agencies  ? 


CHAPTER  II 
THE  PROBLEM  OF  REGULATION 

HISTORIC  FOUNDATIONS  FOB  GOVERNMENTAL  CONTROL 

American  railways  are  privately  owned  and  privately 
operated.  The  problem  of  government  regulation  is  the 
problem  of  harmonizing  with  the  interests  of  the  general 
public  the  private  interests  of  those  who  appear  as  the 
legal  owners  and  managers  of  the  railways.  That  the 
public  interest  is  vitally  involved  in  enforcing  reasonable 
rates,  adequate  service,  and  equality  of  treatment  in  the 
administration  of  railway  enterprise  appears  from  the 
magnitude  and  importance  of  the  railway  industry — from 
the  extent  of  the  physical  properties  of  American  rail- 
ways, and  from  the  economic  significance  as  well  as  the 
social  and  political  importance  of  the  service  which  they 
render. 

But  the  nature  of  American  railway  development  pre- 
sents further  grounds  for  an  intimate  public  concern  in 
the  methods  and  policies  of  private  management  of  rail- 
way enterprise.  The  growth  of  our  railway  net  has  been 
exceedingly  rapid.  The  American  transportation  system, 
comprising  250,000  miles  of  line,  is  the  result  of  less  than 
a  century  of  development.  The  early  railway  ventures 
were  necessarily  speculative  in  their  nature,  and  even 
when  the  efficiency  of  the  railway  as  an  instrument  of 
modern  commerce  and  industry  had  been  established,  rail- 

10 


The  Problem  of  Regulation  11 

way  construction  still  proceeded  in  advance  of  actual 
needs. 

As  a  result,  the  American  people  secured  their  railways 
early  and  in  great  abundance,  but  they  paid  the  price  of 
much  speculative  promotion  and  fraudulent  financiering. 
The  foundation  for  not  a  few  of  this  country's  large  for- 
tunes was  laid  in  the  manipulations  which  marked  the 
early  history  of  American  railways.  Some  of  the  prac- 
tices of  the  early  days  of  railway  promotion  and  railway 
construction  have  become  notorious.  We  shall  have  occa- 
sion to  examine  them  in  the  next  chapter.  But  while  the 
public  tolerated  these  practices  in  the  past,  and  may  even 
be  said  to  have  encouraged  them  by  "its  insensate  desire 
for  swift  development, ' '  there  is  no  reason  why  the  public 
should  continue  to  tolerate  such  practices  or  continue 
indefinitely  to  bear  the  burden  of  past  misdeeds. 

From  the  historic  standpoint,  then,  government  regu- 
lation of  railways  is  a  positive  assertion  by  the  people  at 
large  that  the  old  order  has  changed,  that  the  methods 
which  may  have  been  inevitable  in  the  early  days  of  rail- 
way building  *  are  no  longer  in  harmony  with  an  awak- 

i  Compare  the  following  from  F.  W.  Taussig,  Principles  of  Economics, 
Vol.  2,  pp.  393-94:  "Historically,  the  course  of  development  seems  to  have 
been  controlled  by  a  fated  destiny.  Given  the  impossibility  of  public  own- 
ership and  management  (and  for  the  earlier  stages  of  railway  development 
in  this  country  public  operation  was  out  of  the  question) ;  given  the  eager 
desire  of  the  community  for  ways  of  transportation  and  its  willingness  to 
encourage  their  construction  in  every  way;  given  the  looseness  of  corpora- 
tion laws,  the  universal  speculative  temper,  the  laxness  of  business  standards; 
given  the  periodic  fluctuations  in  industry,  the  economic  peculiarities  of 
railways,  the  opportunities  for  large-scale  ventures — and  the  harvest  was 
prepared  for  the  daring  and  able  operator.  Perhaps  all  the  advantages 
from  rapid  construction,  wide  permeation  of  the  land  with  railway  facilities, 
from  competition  and  consolidation  and  vigorous  management,  could  have 
been  got  in  some  other  way;  but  a  train  of  deep-seated  causes  seems  to 
have  decreed  that  they  should  come  in  just  this  way  and  with  just  these 
checkered  results." 


12  Railway  Regulation 

ened  public  conscience,  and  that  the  present  generation 
will  not  continue  to  pay  tribute  on  the  inflated  railway 
values  of  the  past,  nor  permit  an  unreasonable  return  for 
the  performance  of  public  service. 

Moreover,  though  American  railways  are  privately 
owned  and  privately  operated,  the  public  has  lent  no 
inconsiderable  amount  of  direct  aid  to  railway  construc- 
tion. Its  desire  for  swift  development  showed  itself  in 
the  form  of  gifts  of  public  lands  and  loans  of  public  funds. 
The  nation,  the  states,  the  local  governments,  and  private 
individuals  all  contributed  to  the  development  of  our  pri- 
vately owned  and  privately  operated  railway  net.  The 
public  interest,  then,  which  aims  to  assert  itself  by  a 
system  of  government  regulation,  is  direct  as  well'as  vital. 

THE  LEGAL  BASIS  OF  REGULATION 
THE  PUBLIC  NATURE  OF  TRANSPORTATION  AGENCIES 

The  historical  characteristics  of  American  railway 
development  do  not  of  themselves  afford  a  sufficient  basis 
for  government  regulation  of  the  railway  service. 
Neither  the  past  misdeeds  of  the  railways  nor  the  gener- 
ous aid  of  the  public  provide  an  adequate  explanation  of 
governmental  activity.  The  right  of  the  public  to  exer- 
cise control  arises  from  the  public  nature  of  the  trans- 
portation industry. 

It  is  as  much  a  function  of  the  state  to  provide  railways 
as  it  is  to  provide  public  highways,  and  corporations 
engaged  in  the  transportation  service  are  discharging  a 
function  of  the  state.  The  transportation  agencies  are 
engaged  in  a  service  which  may  properly  be  performed 
by  the  state  itself,  or  may  be  delegated  to  private  indi- 
viduals or  corporations  under  such  supervision  and  con- 


The  Problem  of  Regulation  13 

trol  as  the  public  may  deem  necessary.2  The  courts  have 
repeatedly  recognized  this  public  nature  of  the  trans- 
portation industries,  and  they  have  made  it  clear  that  the 
mere  fact  of  private  ownership  and  operation  does  not 
remove  the  railway  from  the  class  of  public  business. 

A  railroad  is  a  public  highway,  and  none  the  less  so  because 
constructed  and  maintained  through  the  agency  of  a  corporation 
deriving  its  existence  and  powers  from  the  state.  Such  a  cor- 
poration was  created  for  public  purposes.  It  performs  a  func- 
tion of  the  state.  Its  authority  to  exercise  the  right  of  eminent 
domain  and  to  charge  tolls  was  given  primarily  for  the  benefit 
of  the  public.3 

When  private  property  is  " affected  with  a  public  interest," 
it  ceases  to  be  juris  privati  4  only.  *  *  *  Property  does  be- 
come clothed  with  a  public  interest  when  used  in  a  manner  to 
make  it  of  public  consequence  and  affect  the  community  at  large. 
When,  therefore,  one  devotes  his  property  to  a  use  in  which  the 
public  has  an  interest,  he,  in  effect,  grants  to  the  public  an  in- 
terest in  that  use  and  must  submit  to  be  controlled  by  the  public 
for  the  common  good,  to  the  extent  of  the  interest  he  has  thus 
created.  He  may  withdraw  his  grant  by  discontinuing  the  use ; 
but  so  long  as  he  maintains  the  use,  he  must  submit  to  the  con- 
trol.5 

THE  EXERCISE  OF  THE  EIGHT  OF  EMINENT  DOMAIN 

The  public  nature  of  railways  is  clearly  illustrated  by 
the  grants  of  power  invariably  conferred  upon  them  to 
exercise  the  sovereign  right  of  eminent  domain.  The 

2  Compare  the  proposition  of  State  Senator  W.  H.  Hatton  -of  Wisconsin, 
as  quoted  in  Charles  McCarthy,  The  Wisconsin  Idea,  39 :     ' '  That  it  was  as 
much  the  duty  of  the  state  to  furnish  transportation  facilities  as  it  ever 
had  been  to  make  roads  or  build  bridges,  and  that  if  the  function  was  dele- 
gated to  any  one,  it  was  the  duty  of  the  state  to  regulate  it,  so  that  the 
agent  should  be  required  to  furnish  adequate  service,  reasonable  rates,  and 
practice  no  discrimination." 

3  Mr.  Justice  .Harlan  in  Smyth  v.  Ames,  169  U.  S.  466. 

4  That  is,  it  ceases  to  involve  mere  private  rights. 

s  Mr.  Chief  Justice  Waite  in  Munn  v.  Illinois,  94  U.  S.  113. 


14  Railway  Regulation 

right  of  eminent  domain  may  be  exercised,  whether  by 
the  state  or  by  private  individuals  or  associations,  only 
for  public  purposes.6  The  right  of  railway  corporations, 
therefore,  to  compel  the  sale  of  private  lands  at  reason- 
able prices  involves,  in  its  very  nature,  the  use  of  those 
lands  for  public  purposes. 

Moreover,  this  right  of  eminent  domain  is  practically 
indispensable  to  railway  construction.  Without  the  exer- 
cise of  the  state 's  right  of  condemning  land,  the  railway 
company  would  be  at  the  mercy  of  the  owner  of  private 
land.  Railways  must  be  constructed  along  continuous 
lines.  A  given  parcel  of  land,  therefore,  may  become 
absolutely  essential  to  the  progress  of  a  railway  enter- 
prise. By  a  refusal  to  sell,  the  landowner  along  the  rail- 
way's proposed  right  of  way  would  have  the  power  to 
block  the  entire  undertaking;  or  by  holding  out  for  an 
unreasonably  high  price,  he  would  have  the  power  to 
increase  the  cost  of  railway  construction,  and  thus  to 
impose  an  unnecessary  burden  upon  railroad,  shipper, 
and  consumer.  If  railway  companies  were  forced  to 
secure  their  rights  of  way  by  purchase  at  private  sale, 
without  the  sovereign  authority  of  taking  land  at  a  rea- 
sonable valuation,  they  would  find  themselves  held  up 
by  each  successive  property-owner  and  compelled  to  pay 
such  sums  as  are  determined,  not  by  the  value  of  the 
land,  but  by  the  owner's  opportunity  to  take  advantage 
of  the  necessities  of  these  corporations. 

The  public  nature  of  railway  transportation  appears 
the  more  clearly,  then,  from  this  fact,  that  the  very  exist- 

«  The  rule  of  law  is  thus  concisely  stated  in  Wyman  on  Public  Service 
Corporations,  I,  48:  "A  legislature  can  give  a  railroad  or  a  canal  the 
right  of  eminent  domain  only  because  the  company,  irrespective  of  the 
enjoyment  of  that  right,  is  already  public  in  character;  for  private  property, 
under  our  constitutional  limitations,  cannot  be  taken,  even  when  compen- 
sation is  given,  except  for  public  purposes." 


The  Problem  of  Regulation  15 

ence  of  the  plant  upon  which  the  performance  of  the 
railway  service  depends,  involves  the  possession  of  the 
power  to  compel  the  owner  of  property  to  sell  his  land  at 
a  reasonable  price.  For  practical  purposes,  therefore, 
the  very  possibility  of  railway  transportation  depends 
upon  the  exercise  of  the  right  of  eminent  domain,  which 
is  a  public  power  possessed  only  by  the  state. 

Only  the  state,  therefore,  can  normally  provide  rail- 
ways for  the  community;  and  when  the  state  delegates 
this  function,  it  must  delegate  with  it  the  right  of  com- 
pelling the  sale  of  private  property  at  a  reasonable  valua- 
tion, which  is  essential  to  the  normal  prosecution  of 
railway  enterprise.  The  exercise  of  the  right  of  eminent 
domain  by  railway  companies  is  an  example  of  sovereign 
power  vested  in  private  corporations  because  they  are 
engaged  in  public  undertakings ;  the  need  on  the  part  of 
railway  corporations  of  possessing  this  right  of  eminent 
domain  suggests  substantial  grounds  for  considering 
these  undertakings  public  in  their  nature. 

THE  EAILKOAD  AS  A  COMMON  GABBIER 

In  many  respects  the  law  has  imposed  upon  railroads 
the  same  special  responsibilities  which  it  had  imposed 
upon  the  old  common  carriers  before  the  days  of  steam 
transportation.  All  persons  and  corporations  engaged  in 
railway  transportation  on  a  public  basis,  the  courts  hold, 
are  engaged  in  public  employment  and  are  to  be  consid- 
ered common-  carriers.7 

T  For  a  statement  of  the  historical  process  whereby  the  railroads  assumed 
the  position  of  common  carriers  and  came  to  be  so  recognized  by  the  courts, 
compare  the  following  from  Wyman  on  Public  Service  Corporations,  I,  sec. 
176:  "It  is  a  matter  of  history  that  where  the  first  railways  were  laid 
down  at  the  beginning  of  the  nineteenth  century,  the  theory  upon  which 
they  were  constructed  was  that  they  would  be  public  highways,  for  the  use 
of  which  those  that  drove  their  vehicles  over  them  should  pay  toll  as  for 


16  Railway  Regulation 


From  time  immemorial  English  law  has  distinguished 
between  persons  who  carry  occasionally,  under  special 
contract,  and  those  who  profess  to  devote  themselves  to 
transportation  as  a  regular  business.  In  the  case  of  the 
former,  the  carrying  in  which  they  are  engaged  is  con- 
sidered private  business;  in  the  case  of  the  latter  it  is 
looked  upon  as  public  employment.  By  holding  them- 
selves out  to  serve  the  public  generally  in  the  trans- 
portation of  persons  and  goods,  such  individuals  or 
corporations  deliberately  and  voluntarily  take  upon  them- 
selves special  obligations  to  the  public.  In  becoming 
common  carriers  they  assume  extraordinary  responsibili- 
ties in  many  respects.  They  must  serve  all  who  apply ; 
they  must  provide  adequate  facilities ;  they  must  charge 
reasonable  rates ;  they  must  refrain  from  discrimination 
in  rates  and  service;  and  they  become  subject  to  such 
other  special  measures  of  regulation  as  the  state  may 
lawfully  impose. 

In  the  early  days  the  law  of  public  service  was  applied 
only  to  the  carriers  then  known — to  hackmen,  draymen, 

the  use  of  a  turnpike  or  a  canal.  The  introduction  of  the  steam  locomotive 
brought  about  the  end  of  that  theory  almost  before  it  was  put  into  practice. 
A  train  drawn  by  a  locomotive  was  too  expensive,  the  operation  was  too 
costly,  and  its  management  too  intricate  for  any  shipper,  or  even  for  any 
private  carrier.  Almost  from  the  outset,  therefore,  the  railway  company 
provided  and  operated  the  engines  and  cars  themselves,  and  accepted  for 
transportation  such  goods  as  were  offered.  They  thus  became  common 
carriers.  .  .  . 

"In  one  of  the  earlier  cases,  Chicago  &  Aurora  Railroad  v.  Thompson 
(19  111.  578),  the  appellant  railroad  denied  that  it  was  a  common  carrier, 
because  the  charter  of  the  corporation  did  not  declare  it  to  be  so,  but 
Mr.  Justice  Breese  said :  '  We  suppose  it  is  not  necessary  that  the  charters 
should  provide  in  so  many  words  that  the  railroad  companies  created  by 
them  shall  be  common  carriers.  The  authorities  are  numerous  to  the  point 
that  such  companies  using  cars  for  the  purpose  of  carrying  goods  for  all 
persons  indifferently,  for  hire,  and  whose  custom  and  uniform  practice  is 
to  do  so,  are  common  carriers  and  liable  as  such.  There  can  be  no  doubt 
on  this  point.  There  needs  no  legislative  declaration  to  make  them  such. '  ; ' 


The  Problem  of  Regulation  17 

stage-coach  owners,  ferrymen,  and  the  like;  in  the 
eighteenth  century  came  the  regulation  of  toll  bridges, 
turnpikes,  and  canals,  as  public  callings;  and  in  more 
recent  times  the  courts  have  not  hesitated  to  recognize 
that  the  owners  of  modern  transportation  agencies — rail- 
way, express,  and  steamship  companies — are  likewise 
common  carriers,  engaged  in  business  that  is  essentially 
public  in  its  nature. 

THE  ECONOMIC  BASIS  OF  REGULATION 
LEGAL  VERSUS  ECONOMIC  CONSIDERATIONS 

The  foregoing  considerations,  legal  in  their  nature, 
indicate  the  sources  of  governmental  authority  over  rail- 
ways; they  show  why  the  public  has  a  right  to  subject 
railway  companies  to  special  control.  There  is  very 
little  controversy  as  to  the  right  of  the  state  to  regulate. 
But  the  right  to  regulate  does  not  necessarily  involve  the 
need  of  regulation.  The  need  of  a  system  of  govern- 
mental control  arises  from  the  business  nature  of  rail- 
ways rather  than  from  their  legal  characteristics.  Most 
of  the  important  questions  involved  in  the  so-called  rail- 
road problem  can  be  traced  to  the  economic  character  of 
the  railway  business,  and  throughout  our  discussion  we 
shall  be  considering  these  characteristics  from  various 
points  of  view.  It  is  sufficient,  in  this  place,  merely  to 
indicate  the  general  nature  of  these  economic  peculiari- 
ties and  their  most  striking  consequences. 

THE  MONOPOLISTIC  CHARACTER  OF  THE  RAILWAY  BUSINESS 

The  need  of  regulation  depends  chiefly  upon  the  mono- 
polistic character  of  the  railway  business.  In  ordinary 
industrial  enterprises  the  existence  of  competition,  when 
free  and  unrestricted  by  artificial  means,  provides  an 


18  Railway  Regulation 


automatic  force  for  the  protection  of  the  public.  High 
prices  and  large  profits  in  a  given  industry  tend  to  attract 
additional  capital  to  that  industry,  which  results,  in  the 
long  run,  in  a  readjustment  of  charges  and  a  reduction 
of  net  returns.  In  like  manner,  inefficient  service  and 
goods  of  inferior  quality  cannot  permanently  be  imposed 
upon  the  public,  because  a  policy  which  is  clearly  inju- 
rious to  the  interests  of  the  consumer  cannot  permanently 
withstand  the  force  of  competition.  The  railway  busi- 
ness, on  the  other  hand,  tends  to  be  operated  under  mono- 
polistic conditions. 

To  some  extent  railways  are  entirely  exempt  from  com- 
petition. The  amount  of  capital  necessary  for  the  con- 
struction of  a  railway  is  so  large  and  the  task  of  railway 
building  is  so  substantial  that  competition  is  always 
relatively  slow  in  becoming  active.  Capitalists  will  not 
unite  so  promptly  in  building  a  parallel  road  because  of 
the  large  sums  that  must  be  risked  in  the  enterprise ;  and 
even  when  they  decide  to  enter  upon  such  an  undertaking, 
the  work  of  construction  requires  so  much  time  that  active 
competition  is  still  further  delayed. 

Moreover,  even  when  the  parallel  road  is  built,  it 
actually  competes  with  the  original  line  only  at  certain 
points — usually  the  more  important  cities — while  at  inter- 
mediate points  the  lines  separate  and  pass  through 
numerous  small  communities  which  have  no  other  rail- 
way facilities.  At  these  non-competing  points,  then,  the 
railways  usually  enjoy  a  monopoly  of  local  traffic;  and 
while  the  number  of  non-competing  points  is  gradually 
being  reduced  by  the  construction  of  new  steam  roads 
and  the  multiplication  of  electric  railway  lines,  doubtless, 
because  of  the  very  nature  of  the  railway,  there  will 
always  be  many  localities  which,  in  the  absence  of  govern- 
ment control,  will  be  at  the  mercy  of  one  transportation 


The  Problem  of  Regulation  19 

agency.     In    part,    therefore,    the    railway   business   is 
clearly  monopolistic  in  character. 

In  this  respect  the  railway  business  stands  in  striking 
contrast  to  the  more  effective  competition  in  water 
transportation.  The-  highway  between  all  ports  is  free 
to  every  one,  except  in  the  case  of  canals,  and  even  these 
waterways  are  open  to  all  on  equal  terms.  The  cost  of 
vessels  is  small  as  compared  with  that  of  a  railway  and 
its  facilities,  and  they  may  be  constructed  in  a  relatively 
short  period  of  time.  Moreover,  vessels  may  usually  be 
promptly  purchased  or  chartered.  The  result  is  a  strong 
tendency  for  competition  on  water  to  spring  quickly  into 
existence  and  to  be  very  active ;  but  even  in  water  trans- 
portation competition  is  not  as  effective  as  it  is  under 
normal  conditions  in  the  manufacturing  industries. 

THE   NATURE   OF   RAILWAY   COMPETITION 

The  railway  business,  because  of  the  character  of  rail- 
way competition,  tends  to  be  carried  on  under  monopolis- 
tic conditions  even  when  competition  does  exist.  Rail- 
way rivalry  tends  to  be  abnormally  keen  and  competition 
ruinous.  This,  in  turn,  leads  to  co-operation  in  various 
forms,  and  the  inevitable  result  follows  that  railway 
competition  becomes  self-destructive.  Competing  rail- 
way companies,  weary  of  the  keen  struggle  which  invaria- 
bly ensues  when  competition  becomes  active,  either  con- 
sent to  a  truce  whereby  competition  between  them  is 
abolished  and  arrive  at  an  agreement  for  the  maintenance 
of  rates,  or  continue  their  warfare  until  one  of  the  roads 
is  driven  to  insolvency,  and  the  unsuccessful  line,  upon 
reorganization,  is  taken  over  by  its  victorious  rival.  In 
either  case  effective  competition  is  destroyed  and  monop- 


20  Railway  Regulation 


olistic  conditions  are  established.8  The  basis  of  this 
ruinous  competition  is  to  be  found  in  the  two  following 
fundamental  economic  characteristics  of  the  railway 
business. 

JOINT   COST  AND  RAILWAY   MANAGEMENT 

The  services  of  a  railway  are  rendered  to  a  very  large 
degree  at  joint  cost.  From  one-half  to  three-quarters 
of  a  railway's  expenditures  must  be  incurred,  regard- 
less of  the  performance  of  any  particular  service.  In 
order  to  conduct  transportation  at  all,  a  roadbed  must 
be  provided,  tracks  must  be  laid,  and  terminals  must  be 
built.  This  plant  is  necessary  for  the  transportation  of 
passengers  and  freight  as  well  as  express  and  mail  mat- 
ter. Moreover,  it  is  equally  necessary  for  the  transpor- 
tation of  different  classes  of  passengers  and  different 
kinds  of  freight. 

The  expenditures  for  the  fundamental  purpose  of  pro- 
viding the  plant  of  a  railway  enterprise  create  the  fixed 
charges  of  the  business;  and  these  fixed  charges,  the 

8  It  is  to  be  noted  that  in  water  transportation,  in  spite  of  very  keen 
competitive  conditions,  the  tendency  to  monopolistic  control  is  not  nearly 
as  striking  as  in  the  case  of  railway  transportation.  Compare  the  following 
from  E.  S.  Meade,  "Capitalization  of  the  International  Mercantile  Marine 
Company,"  Political  Science  Quarterly,  XIX  (1904),  50-65:  "The  [ship- 
ping] industry  is  strictly,  competitive.  The  high  seas  can  never  be  monop- 
olized. Dockage  facilities  in  the  leading  countries  are  open  to  the  ships  of 
all  the  world,  and  shipyards  will  furnish  a  cargo  steamer  at  a  moderate 
price.  Under  these  conditions,  a  permanent  control  of  the  shipping  indus- 
try, sufficient  to  maintain  rates  or  to  control  traffic,  is  out  of  the  question. 
Agreements  among  the  regular  lines  may  introduce  a  certain  degree  of 
stability  into  passenger  rates,  and  into  the  freight  charges  on  the  higher 
classes  of  commodities;  but  for  the  great  mass  of  traffic,  the  raw  materials 
and  rough  and  half -finished  products  of  commerce,  carriers  and  shippers 
will  continue,  as  they  have  from  time  immemorial,  to  make  their  individual 
bargains,  and  the  rates  of  charge  will  continue  to  be  fixed  by  the  higgling 
of  the  market. ' ' 


The  Problem  of  Regulation  21 

interest  on  the  capital  invested  in  the  construction  of  the 
railway,  form  a  part  of  the  cost  of  every  service  ren- 
dered by  that  railway.  As  far  as  expenditures  for  plant 
are  concerned,  all  railway  operations  are  conducted  at 
joint  cost,  and  even  'the  operating  expenses  are  largely 
joint.  The  roadbed  and  equipment  must  be  maintained 
in  a  state  of  reasonable  repair  and  efficiency,  many  of 
the  employees  and  much  of  the  material  necessary  for 
conducting  transportation  must  be  provided,  and  most 
of  the  general  administrative  expenses  must  be  met, 
regardless  of  the  amount  or  the  kind  of  traffic  carried  by 
the  railway.  In  other  words,  a  substantial  proportion 
of  the  operating  expenses,  like  the  fixed  charges,  are 
constant. 

It  is  practically  impossible,  therefore,  for  the  railway 
manager  to  ascertain  the  exact  cost  of  a  given  service. 
Rate-making  must  necessarily  involve  a  large  degree  of 
guesswork,  though  it  is  true  that  this  guesswork  is 
entrusted  to  experts.  Railway  officials  have  no  means  of 
determining  with  certainty  that  rates  have  been  reduced 
to  unprofitable  limits.  Under  the  stress  of  keen  com- 
petition, then,  conditions  are  decidedly  favorable  to  ruin- 
ous rate-cutting,  and  cut-throat  competition  inevitably 
becomes  self -destructive. 

INCREASING  KETUBNS  AND  RAILWAY  POLICY 

Railway  operations  are  so  largely  conducted  at  joint 
cost  because  a  very  large  proportion  of  railway  expendi- 
tures is  fixed  or  constant.  If  a  railway  is  built  and 
equipped  and  is  carrying  a  given  amount  of  traffic,  it  can 
usually  handle  a  vastly  increased  quantity  of  business  at 
a  relatively  slight  additional  expense.  Within  very  wide 
limits,  a  given  plant  and  equipment  will  accommodate  a 
large  as  well  as  a  small  amount  of  traffic,  and  the  only 


22  Railway  Regulation 

additional  cost  involved  in  handling  an  increase  in  traffic 
will  consist  in  that  portion  of  the  operating  expenses 
which  varies  with  the  amount  and  kind  of  service  ren- 
dered. In  other  words,  the  expenditures  of  a  railway 
company  do  not  keep  pace  with  the  services  which  it  per- 
forms; an  increase  in  traffic  does  not  involve  a  propor- 
tionate increase  in  railway  expenditures. 

It  follows,  then,  that  with  each  increase  in  the  amount 
of  traffic  carried,  the  cost  per  unit  decreases ;  and  the  net 
revenues  of  a  railway  increase  faster  than  the  growth  of 
its  traffic.  The  railway  business  is  thus  subject  to  the 
law  of  increasing  returns :  every  increase  in  traffic  results 
in  more  than  a  proportionate  increase  in  profits.  Rail- 
way traffic  managers,  therefore,  work  under  a  powerful 
incentive  to  increase  the  volume  of  their  business,  and 
the  competition  for  traffic  is  intense.  In  fact,  the  passion 
for  traffic  becomes"  the  controlling  passion  of  the  railway 
business.  Traffic  managers  consider  it  their  most  urgent 
duty  to  get  business — to  get  it  at  the  highest  rates  pos- 
sible, but  in  any  event  to  get  it. 

The  profitable  limit  of  rate  reduction  is  so  uncertain, 
because  railway  expenditures  are  so  largely  joint,  and  the 
advantage  of  extensive  traffic  is  so  great,  because  railway 
expenditures  are  so  largely  constant,  that  there  is  a 
natural  and  compelling  tendency  on  the  part  of  railway 
officials  to  reduce  rates  to  whatever  point  may  be  neces- 
sary in  order  to  attract  business  from  competing  lines. 
Ruinous  rate  wars  follow,  and  competition  tends  to  de- 
stroy itself.  These  conditions  lie  at  the  basis  of  the 
abnormal  character  of  railway  competition,  which  almost 
invariably  leads  to  railway  operation  under  monopolistic 
conditions.  Competitive  industries  subject  to  the  law 
of  increasing  returns  naturally  tend  to  monopoly. 


The  Problem  of  Regulation  23 

RAILWAY  COMPETITION  AND  DISCRIMINATORY  PRACTICES 

The  keen  rivalry  for  business  leads  not  merely  to  rate 
wars  and  general  rate-cutting,  but  to  discriminatory  prac- 
tices as  well.  The  passion  for  business  is  so  intense  that 
the  traffic  manager  will  resort  to  any  means  in  order  to 
get  it.  If  the  amount  of  railway  traffic  can  be  extended 
and  hence  the  size  of  railway  profits  disproportionately 
increased  by  means  of  granting  special  privileges  in  the 
transportation  of  one  commodity  as  compared  with 
another,  or  in  the  case  of  one  person  or  locality  as  com- 
pared with  competing  shippers  or  markets,  railway 
officials  will  not  hesitate  long  to  resort  to  these  discrim- 
inatory practices. 

The  history  of  American  railways,  and  of  our  monopo- 
listic industrial  combinations  or  so-called  trusts,  divulges 
no  greater  evil  than  the  granting  of  railway  discrimina- 
tions in  rates  and  service  for  the  benefit  of  one  person, 
locality,  or  kind  of  traffic,  to  the  prejudice  and  disad- 
vantage of  rival  shippers,  places,  and  industries.  The 
motive  or  stimulus  for  these  practices  lies  in  the  keen 
desire  for  additional  business,  with  its  resulting  dispro- 
portionate increase  in  railway  profits.  Discrimination 
has  been  one  of  the  most  baleful  as  well  as  one  of  the  most 
certain  effects  of  railway  competition. 

RAILWAY  DISCRIMINATION  AND  THE  PUBLIC  WELFARE 

•  The  danger  as  well  as  the  injustice  of  discriminatory 
practices  cannot  be  overemphasized.  If  our  industrial  life 
is  to  reach  its  natural  and  most  efficient  economic  develop- 
ment, there  must  be  freedom  of  enterprise  and  fairness 
of  treatment  for  all  persons,  all  sections,  and  all  under- 
takings. In  a  sense,  transportation  is  a  fundamental 
industry  underlying  all  others,  for  it  is  essential  to  the 


24  Railway  Regulation 


conduct  of  all  business  and  goes  far  towards  determining 
the  direction  and  conditions  of  industrial  activity.  The 
item  of  transportation,  whatever  it  may  be,  is  one  of  the 
elements  in  all  costs,  and  the  outcome  of  competition 
between  different  producers  may  be  largely  affected  by 
any  divergence  in  railway  rates  which  must  be  paid  by 
each  of  two  or  more  competitors.  It  follows  clearly,  then, 
that  the  railway  officials  who  make  transportation  rates 
exercise  a  tremendous  power. 

By  the  soundness  of  their  adjustment  of  rates  and  by 
the  degree  of  fairness  with  which  established  rates  are 
observed,  the  railways  may  profoundly  affect — or  even 
absolutely  determine — the  prosperity  of  individuals,  of 
industries,  of  cities  and  towns,  or  of  entire  sections  of 
the  country. 

By  discriminating  between  competing  shippers,  they 
may  destroy  the  business  of  one  and  build  up  that  of 
another,  making  one  man  rich  and  another  poor. 

By  stimulating  or  discouraging  a  particular  class  of 
traffic,  they  may  increase  or  diminish  the  importance  of 
industries  and  the  extent  of  production  in  particular  lines 
of  commerce,  thus  shaping  the  direction  of  industrial 
activity. 

By  discriminating  among  cities  and  towns,  they  may 
cause  one  to  grow  and  another  to  decay,  and  thus  deter- 
mine the  commercial  importance  of  business  centers. 

By  modifying  their  rate  schedules  in  special  instances, 
they  may  determine  the  location  of  industries,  guide  the 
movements  of  population,  and  affect  the  prosperity  and 
welfare  of  extensive  localities. 

By  these  unfair  practices  the  railways  also  have  it 
within  their  power  to  build  up  industrial  monopoly ;  and 
the  most  powerful  of  the  trusts  against  which  the  people 
are  now  struggling  made  their  first  advances  towards 


The  Problem  of  Regulation  25 

control  of  the  market  through  the  agency  of  special  favors 
in  the  form  of  railway  discriminations. 

THE  PROBLEM  OF  REGULATION 
THE  NEED  OF  GOVERNMENT  REGULATION 

The  need  of  government  regulation  follows  clearly, 
then,  from  the  economic  character  of  railway  transporta- 
tion. Competition  cannot  be  relied  upon  as  a  regulating 
force.  When  it  is  resorted  to  by  competing  railways,  it 
introduces  evils  of  its  own  that  are  vitally  prejudicial 
to  the  public  welfare.  It  causes  instability  of  rate  adjust- 
ments, industrial  fluctuation,  and  gross  discrimination 
between  rival  shippers,  different  classes  of  traffic,  and 
competing  business  centers.  The  abnormal  nature  of 
this  competition  makes  it  of  temporary  duration.  Co- 
operation of  some  sort,  whether  by  actual  consolidation 
or  by  mere  agreement,  almost  invariably  follows. 

The  problem  resolves  itself,  therefore,  into  a  considera- 
tion of  what  constitutes  a  wise  attitude  towards  private 
monopoly ;  and  from  time  immemorial  it  has  been  a  cardi- 
nal principle  of  English  thought  that  private  monopoly 
cannot  wisely  be  left  unregulated.  Government  regula- 
tion is  necessary  in  order  to  correct  the  evils  which  are 
inseparable  from  railway  competition,  whenever  bona 
fide  rivalry  exists,  and  to  prevent  the  abuse  of  monopoly 
power,  whenever,  as  is  the  normal  tendency  in  the  rail- 
way business,  operations  are  conducted  under  monopo- 
listic conditions.  It  is  inconsistent  with  any  sound 
present-day  economic  policy  that  a  power  over  the  public 
as  great  as  that  enjoyed  by  the  railways  should  be  exer- 
cised by  private  persons  without  direct  responsibility  to 
the  people. 


26  Railway  Regulation 

THE  DANGERS   OF  EXCESSIVE  REGULATION 

The  railway  industry  in  the  United  States  possesses 
a  private  as  well  as  a  public  side,  and  a  genuine  considera- 
tion of  public  welfare  demands  the  proper  protection  of 
the  private  interests  involved.  American  railways  are 
privately  owned  and  privately  operated.  Our  whole 
economic  structure  is  based  upon  a  faith  in  the  efficiency 
and  far-reaching  advantages  of  private  enterprise. 
Under  this  system  the  American  railway  net  was  built  and 
developed,  attaining  a  physical  extent  and  an  operating 
effectiveness  unparalleled  by  any  railway  system  in  the 
world.  This  railway  net  must  be  maintained  and  ex- 
tended, accommodating  existing  needs  and  adjusting 
itself  to  the  economic  changes  in  the  community.  To 
perform  this  task  effectively,  further  investment  in  rail- 
way enterprise  is  necessary,  and  in  order  that  this  addi- 
tional capital  may  be  forthcoming,  the  investing  public 
must  not  be  lost  sight  of  in  the  application  of  a  system 
of  public  regulation.  Moreover,  what  is  more  important, 
if  our  faith  in  private  enterprise  is  to  continue,  the  pow- 
ers and  activities  of  the  regulating  authorities  must  not 
be  so  extensive  as  to  destroy  the  exercise  of  private 
initiative. 

The  railways  must  be  made  to  recognize  the  public 
nature  of  their  undertaking,  but  within  the  limits  of  pub- 
lic welfare  they  must  be  restricted  as  little  as  possible  in 
developing  the  American  transportation  system.  The 
dangers  of  regulation,  then,  consist  in  the  establishment 
of  excessive  regulation  in  the  name  of  public  policy.  A 
very  important  element  of  public  policy  involves  the 
demand  that  railway  operations  be  conducted  under  con- 
ditions of  highest  efficiency,  and  it  is  still  a  basic 
principle  of  American  industrial  institutions  that  the 


The  Problem  of  Regulation  27 

highest  economic  efficiency  can  be  attained  through  the 
medium  of  private  enterprise.  The  state  must  not  under- 
take to  operate  the  privately  owned  railways,  and  its 
policies  of  regulation  must  not  be  so  extensive  as  to  dis- 
courage that  enterprise  and  initiative  which  have  been 
so  remarkably  effective  in  American  railway  history. 

THE  ESSENCE  OF  THE  TASK 

There  is  almost  as  little  controversy  today  on  the  need 
of  regulation  as  there  is  on  the  right  of  the  state  to  regu- 
late railway  transportation.  The  representatives  of  the 
railways  as  well  as  the  advocates  of  the  people  admit 
the  need  of  regulation.  Both  the  principle  and  the  prac- 
tice of  regulation  are  now  well  established.  For  almost 
half  a  century  the  states  have  been  exercising  adminis- 
trative control  over  railways,  and  it  is  more  than  twenty- 
five  years  since  Congress  passed  the  Act  to  Regulate 
Commerce  and  created  the  Interstate  Commerce  Com- 
mission. The  conflict  today  concerns  itself  with  the  extent 
or  degree  of  governmental  control. 

The  problem  of  regulation  is  to  harmonize  public  and 
private  interests,  to  develop  a  system  whereby  the  public 
welfare  will  be  promoted  and  private  enterprise  will  be 
stimulated.  That  is  the  essence  of  the  task,  and  it  pre- 
sents an  ideal  difficult  of  attainment.  The  chapters  that 
follow  will  consider  in  detail  the  specific  problems  which 
that  task  presents  and  the  policies  and  methods  followed 
by  the  states  and  the  national  government  in  performing 
the  important  duties  of  railway  regulation. 


28  Railway  Regulation 

TEST  QUESTIONS 

1.  On  what  historic  basis  does  the  governmental  control  of 
carriers  rest? 

2.  Why  are  the  railways  allowed  to  exercise  the  right  of 
eminent  domain? 

3.  What  is  the  meaning  of  the  term  ' '  common  carriers ' '  ? 

4.  Why  is  the  railway  business  naturally  monopolistic  ? 

5.  Why  is  joint  cost  such  an  important  factor  in  the  manage- 
ment of  railways? 

6.  What  is  meant  by  the  term  "increasing  returns"  in  con- 
nection with  transportation? 

7.  Why    does   railway   competition   naturally    lead    to   dis- 
crimination ? 

8.  Why  is  railway  discrimination  so  injurious  to  business 
interests  and  to  the  public  welfare  ? 

9.  Why  is  there  such  a  strong  need  of  government  regulation 
of  transportation  agencies  ? 

10.  What  are  some  of  the  dangers  of  excessive  regulation  ? 


CHAPTER  in 
AMERICAN  RAILWAY  DEVELOPMENT 

THE  DEVELOPMENT  OF  RAILWAY  TKANSPORTATION 
THE  ANTECEDENTS  OF  THE  RAILWAY 

In  view  of  the  vast  extent  of  our  present  railway  net, 
it  is  difficult  to  realize  the  fact  that  railway  transportation 
in  the  United  States  is  not  a  century  old.  As  late  as  1830 
turnpikes  and  canals,  together  with  such  rivers  as  were 
navigable,  constituted  the  chief  means  of  transportation. 
The  development  of  turnpikes  and  canals  became  a  seri- 
ous enterprise  soon  after  1790,  partly  in  fulfilment  of 
the  government  policy  of  internal  improvements,  and 
partly  through  private  enterprise,  stimulated  by  substan- 
tial aid  received  from  both  the  national  and  the  state 
governments. 

The  most  important  highway  or  turnpike  was  con- 
structed by  the  United  States.  It  was  known  as  the  Cum- 
berland Road,  or  "National  Pike."  It  started  from 
Cumberland,  Maryland,  which  was  then  about  the  center 
of  population,  extended  across  the  middle  west  through 
Ohio  and  Indiana,  and  finally  reached  Vandalia  in  Illi- 
nois. It  was  begun  in  1806,  and  its  final  stretches  were 
completed  in  1827.  The  original  intention  was  that  this 
turnpike  should  extend  to  St.  Louis  or  Jefferson  City, 
Missouri,  but  the  superiority  of  canals  and  the  possibility 

29 


30  Railway  Regulation 

of  railways  became  clearly  established  before  this  plan 
could  be  carried  out. 

The  construction  of  canals  constituted  an  advance  upon 
the  building  of  toll  roads.  There  was  much  activity  in 
canal  building,  particularly  after  the  war  of  1812,  and 
much  capital,  often  secured  from  the  states  as  subsidies, 
was  wasted.  The  most  important  and  the  most  successful 
undertaking  of  this  sort  was  the  Erie  Canal,  connecting 
the  Hudson  Eiver  and  Lake  Erie  at  Buffalo.  This  was 
begun  by  the  state  of  New  York  in  1817  and  was  com- 
pleted in  1825.  It  was  profitable  from  a  financial  stand- 
point and  succeeded  in  giving  the  city  of  New  York  the 
leading  commercial  position  which  it  now  holds. 

The  completion  of  the  Erie  Canal  in  1825  came,  how- 
ever, only  a  few  years  before  the  successful  use  of  the 
steam  locomotive.  As  soon  as  the  practicability  of  the 
railway  was  proved,  its  superiority  to  all  other  means  of 
transportation  began  to  be  universally  recognized.  By 
about  1840,  therefore,  activity  in  canal  construction 
entered  upon  a  noticeable  decline,  and  by  the  middle  of 
the  century  it  had  practically  ceased. 

THE  BEGINNINGS  OF  THE  RAILWAY 

Kailways  in  the  strict  sense  of  the  term — that  is,  roads 
provided  with  rails  upon  which  wheels  could  run — had 
existed  in  England  for  about  a  century  and  a  half  before 
railway  transportation  in  the  modern  sense  had  been 
developed.  The  application  of  steam  to  transportation 
constituted  the  great  change.  The  essence  of  this  change 
consisted  in  the  substitution  of  mechanical  for  muscular 
power  in  the  transportation  of  persons  and  the  carriage 
of  goods.  As  early  as  1807  Eobert  Fulton  established 
conclusively  the  practicability  of  steam  navigation  (many 
experiments,  with  varying  degrees  of  success,  having 


American  Railway  Development  31 

been  undertaken  during  the  preceding  two  decades),  and 
thereafter  steam  vessels  multiplied  with  great  rapidity. 
But  the  success  of  the  steam  locomotive  as  we  now  know 
it  was  not  assured  until  1829,  when  George  Stephenson, 
in  a  trial  test  on  the  Liverpool  and  Manchester  Kailroad, 
demonstrated  that  his  famous  locomotive,  the  "Rocket," 
could  attain  a  speed  of  29  miles  an  hour. 

With  the  locomotive  on  a  practical  basis,  railway  trans- 
portation in  the  modern  sense  was  permanently  estab- 
lished. The  construction  of  the  Baltimore  &  Ohio  road 
marks  the  real  beginning  of  the  railway  in  the  United 
States.  The  significance  of  this  early  railroad  building 
was  strikingly  emphasized  by  President  Hadley  of  Yale 
when  he  wrote,  in  1885 : 

On  the  fourth  of  July,  1828,  Charles  Carroll,  last  surviving 
signer  of  the  Declaration  of  Independence,  laid  the  first  rail  of 
the  Baltimore  &  Ohio  Railroad.  One  man's  life  formed  the 
connecting  link  between  the  political  revolution  of  the  last  cen- 
tury and  the  industrial  revolution  of  the  present.1 

During  the  early  years  of  railway  enterprise  construc- 
tion was  undertaken  on  a  small  scale.  The  Charleston 
&  Hamburg  Railroad  of  South  Carolina,  for  example, 
which  was  chartered  in  1829  and  had  137  miles  of  line  in 
operation  by  1834,  was  for  a  short  time  considered  the 
longest  line  in  the  world  under  a  single  management.  In 
1835  the  Pennsylvania  Railroad,  with  a  little  more  than 
200  miles  of  line,  had  about  a  quarter  of  the  entire  rail- 
way mileage  in  the  United  States. 

Moreover,  in  the  beginning  people  were  not  altogether 
unanimous  in  their  support  of  railway  enterprise,  even 
after  the  superiority  of  the  railway  over  all  other  means 
of  transportation  had  been  clearly  established.  Opposi- 

i  A.  T.  Hadley,  Eailroad  Transportation,  1. 


32  Railway  Regulation 

tion  was  manifested  in  many  quarters.  Those  who  had 
invested  in  the  construction  of  turnpikes  and  canals  bit- 
terly resented  the  intrusion  of  railway  competition,  and 
so  powerful  was  the  influence  of  canal  interests  that  in 
some  cases  railways  were  at  first  denied  the  privilege  of 
carrying  freight.  Farmers,  tavern-keepers,  and  others 
who  anticipated  that  railway  progress  would  injure  their 
personal  interests  also  made  vigorous  protests.  But  the 
fundamental  advantages  of  railway  transportation  made 
the  acceptance  of  the  new  agency  inevitable,  and  finally 
popular  enthusiasm  for  railway  construction  effectively 
silenced  the  voice  of  all  opposition. 

THE  GROWTH  OF  RAILWAY  MILEAGE 

A  mere  resume,  by  decades,  of  the  growth  of  railway 
mileage  will  indicate  the  remarkable  rapidity  with  which 
the  American  railway  net  was  developed.  In  1830  there 
were  but  23  miles  of  steam  railway  in  the  United  States. 
Ten  years  later  the  mileage  had  increased  to  2,818,  and 
in  another  decade  the  total  had  reached  9,021  miles.  Dur- 
ing these  twTo  decades  construction  had  been  largely 
confined  to  the  seaboard  states,  and  especially  to  the 
northeast,  most  of  the  lines  radiating  from  the  Atlantic 
seaports.  Then  came  the  development  of  the  south  and 
the  west,  and  the  prosperity  incident  to  the  discovery  of 
gold  in  California  in  1848.  The  north  central  states 
became  well  covered  with  tracks  in  a  surprisingly  short 
time.  By  1860  the  railway  mileage  of  the  country  was 
30,635,  and  by  1870  it  had  increased  to  52,914  miles.  The 
panic  of  1857  and  the  Civil  War  naturally  exercised  a 
depressing  influence  on  railway  construction,  as  they  did 
on  all  enterprise. 

In  one  way,  however,  the  war  served  as  a  stimulus  to 
railroad  building.  A  transcontinental  route  had  long 


American  Railway  Development  33 

been  the  subject  of  discussion,  but  it  became  a  reality 
only  when  the  war  made  it  politically  important  to  unite 
the  Pacific  coast  with  the  north  and  to  provide  adequate 
means  of  sending  troops  and  military  equipment  to  the 
west,  if  occasion  should  arise.  Accordingly,  in  1862, 
Congress  passed  an  act  under  which  the  Union  Pacific 
road  and  its  connections  were  built  from  Omaha  to  Cali- 
fornia, and  again,  in  1864,  an  act  providing  for  the  con- 
struction of  the  Northern  Pacific  road.  At  the  conclusion 
of  the  war  further  grants  were  made  for  western  railway 
extension,  other  transcontinental  roads  being  thereby 
gradually  established. 

By  1880  the  railway  mileage  of  the  country  had  in- 
creased to  93,296.  From  1868  to  1873  there  had  been 
feverish  activity  in  railway  building,  the  speculative 
nature  of  many  of  these  undertakings  largely  contribut- 
ing to  the  panic  of  1873.  For  the  five  years  that  followed, 
from  1873  to  1878,  there  was  a  comparative  lull  in  rail- 
way construction,  and  then  began  the  most  remarkable 
period  of  expansion  in  the  history  of  transportation.  In 
the  decade  from  1880  to  1890  more  than  70,000  miles  of 
line  were  constructed,  making  the  total  mileage  163,597. 
The  following  decade  witnessed  more  conservative  exten- 
sion, partly  because  the  depression  following  the  panic 
of  1893  was  unfavorable  to  railway  construction,  and 
partly  because  the  rapid  building  of  the  previous  ten 
years  had  supplied  many  parts  of  the  country  with  ade- 
quate facilities.  Nevertheless  the  mileage  in  1900  had 
increased  to  193,346,  and  on  June  30,  1912,  there  were 
249,852  miles  of  railway  in  the  United  States. 

INTENSIVE   DEVELOPMENT   OF   THE   RAILWAY   SERVICE 

An  adequate  exposition  of  how  the  railroads  in  this 
country  have  increased  not  only  in  length  but  in  capacity 


34  Railway  Regulation 


for  handling  traffic,  more  powerful  locomotives,  larger 
cars,  etc.,  is  beyond  the  scope  of  this  text.  It  would 
include  a  discussion  of  the  technical  growth  of  the  mech- 
anism of  the  railway — of  the  track,  the  locomotive,  the 
passenger-coach,  the  freight-car,  the  terminal  facilities; 
it  would  involve  not  merely  such  questions  as  the  com- 
parative tractive  power  of  locomotives  and  the  compara- 
tive capacity  of  freight-cars,  but  also  a  discussion  of  the 
recent  developments  in  transportation  by  means  of  elec- 
trical power.  This  last  has  resulted  in  a  rapidly  growing 
net-work  of  interurban  electric  railways  and  in  the 
appearance  of  the  increasingly  important  problem  of  the 
electrification  of  steam  railways.  A  mere  enumeration  of 
the  various  classes  of  cars  now  used  on  American  rail- 
ways— passenger,  dining,  parlor,  sleeping,  baggage,  ex- 
press, postal,  box,  flat,  stock,  coal,  tank,  refrigerator — 
indicates  the  extreme  differentiation  of  the  service  for 
the  greater  convenience  of  the  users  of  railway  trans- 
portation. 

But  at  this  point,  in  connection  with  the  preceding 
discussion  of  the  growth  of  railway  mileage,  it  is  particu- 
larly important  to  note  that,  in  addition  to  extending 
their  lines,  the  railways  have  enlarged  their  capacity  for 
serving  the  public  by  constructing  additional  tracks.  The 
double  tracking  of  the  New  York  Central  Kailroad,  the 
first  in  this  country,  was  not  accomplished  till  the  Civil 
War.  In  recent  years  the  growth  of  additional  trackage 
has  been  very  rapid.  From  1890  to  1907,  for  example, 
while  railway  mileage  (single-track)  increased  only  40 
per  cent,  the  amount  of  second  track  increased  130  per 
cent  (from  8,438  to  19,421  miles),  the  amount  of  third 
track  increased  157  per  cent  (from  761  to  1,960  miles), 
and  the  amount  of  fourth  track  increased  347  per  cent 
(from  562  to  1,390  miles).  The  mileage  of  yard  tracks 


American  Railway  Development  35 

and  sidings  also  increased  130  per  cent  (from  33,711  to 
77,749  miles)  during  that  period,  and  in  1912  the  total 
trackage  actually  in  operation  amounted  to  371,238  miles, 
as  compared  with  249,852  miles  of  line. 

PUBLIC  AID  TO  RAILWAY  CONSTRUCTION 
THE  NATURE  AND  PURPOSES  OF  PUBLIC  AID 

In  the  development  of  American  railways  the  attitude 
of  the  public  toward  railway  corporations  has  undergone 
extreme  variations — having  changed  from  the  establish- 
ment of  a  policy  of  liberal  aid  and  encouragement  to  the 
withdrawal  of  all  assistance  and  the  adoption  of  a  policy 
of  restriction  and  regulation. 

In  the  earliest  days  some  of  the  states  directly  under- 
took the  construction  of  railways  as  government  enter- 
prises. This  policy  was  short-lived.  The  panic  of  1837, 
and  the  long  depression  that  followed,  found  many  states 
in  such  a  deplorable  financial  condition  that  they  were 
practically  compelled  to  abandon  their  work  of  railway 
construction  and  even  to  sell  to  private  companies  the 
roads  they  had  already  built.  This  they  usually  did  at 
a  sacrifice.  The  state  of  Michigan  sold  its  southern  road 
to  the  Michigan  Southern  Eailroad  Company  for  little 
more  than  half  of  its  actual  cost. 

What  happened  in  Michigan  was  typical  of  the  whole  western 
situation.  In  the  early  days  of  its  statehood  it  had  planned 
and  partly  built  two  lines  of  railroad  across  its  lower  peninsula, 
from  east  to  west.  So  severely,  however,  was  the  state  shaken 
by  the  panic  that,  in  spite  of  its  heroic  efforts  to  meet  its  obliga- 
tions, the  Word  Michigan  became  a  scarecrow  to  eastern  capital. 
As  the  years  went  on  and  there  proved  to  be  no  possibility  of 
completing  the  roads  or  even  of  procuring  the  money  necessary 
to  keep  them  in  repair,  it  grew  plain  that  the  state  must  get  rid 


36  Railway  Regulation 

of  them.  One,  the  Michigan  Central,  one  hundred  and  forty- 
five  miles  long,  ran  from  Detroit  to  Kalamazoo.  The  other,  the 
Michigan  Southern,  also  ran  nowhere,  but  achieved  the  same 
result  with  less  effort,  being  only  seventy-five  miles  long.2 

While  the  states  early  withdrew  from  direct  operations 
in  the  field  of  railway  enterprise,  however,  they  did  not 
so  soon  relinquish  the  policy  which  they  had  pursued 
almost  from  the  beginning  of  railway  transportation— 
that  of  giving  substantial  aid  to  private  companies.  In 
this  policy  the  states  were  joined  by  local  governments 
and  individuals,  and  later  by  the  federal  government, 
with  the  result  that  until  about  1870  railway  building 
was  largely  stimulated  by  extensive  public  assistance. 
The  contributions  of  the  state  and  local  governments, 
as  well  as  of  private  individuals,  were  made  primarily 
as  a  means  of  developing  the  industrial  and  commercial 
importance  of  particular  localities  by  securing  access  to 
new  markets.  The  federal  government  was  actuated  not 
only  by  a  desire  to  push  the  frontier  westward  by  pro- 
moting the  settlement  of  the  country,  but  also  by  the 
necessity  of  providing  better  transportation  facilities  for 
the  handling  of  the  mails  and  the  movement  of  troops. 
The  importance  of  railways  for  the  movement  of  troops 
has  been  amply  illustrated  in  the  European  war  which 
started  in  1914. 

STATE   AND  LOCAL  AID 

The  aid  to  railway  construction  rendered  by  the  state 
and  local  governments  took  many  forms.  Actual  dona- 
tions in  cash  were  made  in  large  amounts  by  cities  and 
other  local  units,  and  to  a  smaller  extent  by  the  states. 

2  H.  G.  Pearson,  ' '  An  American  Railroad  Builder,' '  23,  24,  as  reprinted 
in  Bipley,  Railway  Problems  (revised  edition),  62. 


American  Railway  Development  37 

The  loans  of  credit  and  of  money  that  were  made  to 
railway  companies  likewise  turned  out  to  be  mainly  gifts, 
only  a  portion  of  them  ever  being  repaid  by  the  com- 
panies. 

One  of  the  most  common  forms  of  government  aid  was 
the  purchase  of  railway  stocks  and  bonds  with  public 
funds.  The  hope  that  the  investment  would  prove  profit- 
able, the  returns  by  the  railway  companies  more  than 
equaling  the  interest  paid  by  the  state  for  the  money 
borrowed,  was  very  seldom  realized.  States  and  cities 
also  assisted  the  railways  by  guaranteeing  their  bonds, 
or  by  guaranteeing  interest  on  bonds  and  dividends  on 
stock. 

Land  grants  were  also  common,  both  from  cities,  as 
sites  for  stations  and  yards,  and  from  many  of  the  states, 
for  rights  of  way  and  for  general  railway  purposes. 
Texas  alone  granted  portions  of  its  domain  which  equaled 
in  area  the  whole  of  New  York  State. 

NATIONAL   AID 

The  promotion  of  railway  enterprise  was  stimulated 
by  the  federal  government  through  large  grants  of  land 
and  generous  loans  of  public  funds.  The  federal  land 
grants  began  about  1850.  Statute  after  statute  was 
passed  providing  for  grants  of  land  from  the  national 
domain.  The  transcontinental  roads  were  the  most 
favored  beneficiaries  of  these  grants.  It  is  estimated  that 
the  direct  land  grants  of  the  national  government,  be- 
tween 1862  and  1871,  amounted  to  26,000,000  acres,  or 
some  40,000  square  miles,  and  that  the  total  land  grants, 
between  1850  and  1871,  amounted  to  155,000,000  acres,  or 
some  242,000  square  miles. 

These  public  land  grants  exceed  in  area  the  whole  of 
the  German  Empire ;  they  comprise  an  area  four  times  as 


38  Railway  Regulation 

great  as  that  of  all  the  New  England  states.  In  addition 
to  these  grants  of  land,  the  federal  government  loaned 
the  transcontinental  roads,  particularly  the  Union  Pacific 
and  its  connections,  no  less  than  $64,623,512  in  United 
States  bonds. 

THE   EXTENT   OF   PUBLIC   AID 

It  is  practically  impossible  to  determine  with  certainty 
the  full  extent  of  the  aid  received  by  American  railways 
from  the  federal,  state,  and  local  governments.  Even 
the  most  painstaking  investigations  must  rely  merely 
upon  estimates  in  many  particulars.  In  some  cases  the 
aid  described  in  the  legislative  enactments  was  never 
fully  received,  the  railways  failing  to  comply  with  the 
specified  conditions.  In  other  cases,  it  has  been  discov- 
ered, assistance  was  given  in  excess  of  that  authorized. 
The  public  bonds  given  to  railways  were  often  sold  at  a 
discount,  so  that  the  actual  sums  received  were  not  equal 
to  the  nominal  amounts  specified  in  the  laws.  The  extent 
to  which  loans  to  railways  became  gifts  because  of  non- 
payment cannot  be  accurately  determined.  It  is  im- 
possible to  ascertain  how  much  actual  cash  has  been 
realized  by  railway  companies  from  the  enormous 
gifts  of  land  conferred  upon  them  by  the  nation,  the 
states,  and  the  local  governments ;  and  it  is  difficult  even 
to  estimate  satisfactorily  the  value  of  rights  of  way,  depot 
grounds,  materials,  and  other  property  received  from  the 
public.  But  that  the  total  amount  of  such  public  aid  was 
enormous — running  into  hundreds  of  millions  of  dollars 
— is  evident  even  from  the  most  cursory  examination  of 
the  facts. 


American  Railway  Development  39 

THE  SPECULATIVE  CHARACTER  OF  AMERICAN  RAILWAY 
DEVELOPMENT 

CAUSES  OF  SPECULATIVE  CONSTRUCTION 

The  policy  of  public  encouragement  of  railways,  so 
lavishly  pursued  at  first,  was  gradually  relinquished,  and 
early  in  the  seventies  it  had  been  practically  abandoned. 
In  part  this  change  of  policy  was  due  to  the  fact  that 
many  of  the  state  and  local  governments  were  plunged 
so  heavily  into  debt,  and  were  laboring  under  such  heavy 
burdens  of  taxation,  that  some  of  them  were  compelled 
to  repudiate  their  obligations.  To  a  large  extent,  how- 
ever, the  change  of  attitude  on  the  part  of  the  public  may 
be  ascribed  to  the  speculative  character  of  American 
railway  development. 

Most  of  the  railroads  of  the  United  States  were  built 
to  accommodate  the  needs  of  the  future  and  not  of  the 
present.  Moreover,  though  the  earliest  roads  secured 
their  capital  by  stock  subscription,  most  of  the  lines  were 
built  with  money  borrowed  through  the  issue  of  bonds. 
As  a  result  of  these  conditions  the  spirit  of  speculation 
permeated  most  railway  enterprise,  and  much  of  the 
speculative  activity  ran  over  into  fraud  and  corruption. 

Furthermore,  the  system  of  government  aid  accentu- 
ated these  tendencies  to  fraud  and  corruption.  The  pub- 
lic subsidies  not  only  resulted  in  the  construction  of  roads 
long  before  the  commercial  necessity  for  them  had  arisen, 
but  they  led  to  extravagant  expenditures,  attracted  finan- 
cial adventurers,  and  encouraged  irresponsibility  in  the 
use  of  both  private  and  public  funds.  The  bounty  of 
the  government  was  frequently  accepted  by  promoters 
largely  because  public  aid  could  be  used  as  a  basis  for 
profitable  speculation. 


40  Railway  Regulation 

CONSTRUCTION     COMPANIES     AND     FINANCIAL     MANIPULATION 

This  speculative  character  of  American  railway  build- 
ing has  led  to  financial  manipulation  and  fraudulent 
practices.  The  Erie  Railroad,  for  example,  between  1868 
and  1872,  increased  its  capital  stock  from  $17,000,000  to 
$78,000,000;  and  these  issues  were  very  largely,  if  not 
exclusively,  made  for  the  purpose  of  manipulating  the 
market.  Many  of  the  roads  paid  excessive  sums  to  con- 
struction companies  under  the  control  of  men  who  were 
also  in  control  of  the  railroad  companies.  These  prac- 
tices have  been  frankly  admitted  by  railroad  men  as  well 
as  emphasized  by  impartial  students  of  the  railroad  prob- 
lem. The  methods  of  the  early  railway  promoters  have 
been  strikingly  described  by  a  former  railway  president : 

Their  plan  was  to  procure  the  most  favorable  charters  from 
the  states  or  the  Government,  to  obtain  large  concessions  in  lands 
along  the  line,  then  organize  a  company,  issue  as  many  bonds 
per  mile  and  as  much  stock  as  they  thought  the  public  would 
take,  obtain  from  cities  and  towns  as  large  subsidies  as  possible 
in  money  and  promises,  then  make  contracts  with  themselves  by 
which  they  received  all  the  lands,  subsidies,  bonds  and  stock  for 
constructing  the  railway.  They  constructed  it  as  cheaply  as 
possible,  they  sold  the  lands  for  the  best  price  obtainable,  sold 
the  bonds  and  stock  to  the  public,  and  then  marched  on  to  take 
other  contracts  and  conquer  other  lands.  When  the  day  of  reck- 
oning came,  as  it  was  bound  to,  the  public  found  itself  the  owner 
of  bonds  upon  which  the  interest  could  not  be  paid,  and  the  com- 
munities found  themselves  with  a  poor  railway  in  which  they  had 
no  direct  pecuniary  interest.  They  saw  the  contractors  with 
enormous  fortunes,  and  they  concluded  that  they  had  been 
cheated  and  robbed.3 

Professor  Eipley  of  Harvard  University  has  described 
these  methods,  which  "  correspond  pretty  closely  with  the 

3  From  a  lecture  by  M.  E.  Ingalls,  in  the  Purdue  University  Lectures  in 
Railroad  Engineering  and  Allied  Subjects,  71,  72. 


American  Railway  Development  41 

methods  of  the  notorious  Credit  Mobilier  and  other  com- 
panies concerned  a  generation  ago  in  the  construction  of 
our  transcontinental  roads, "  by  the  following  concrete 
hypothetical  example : 

A  knot  of  promoters  planning  an  enterprise  first  formed  a 
railroad  corporation  and  authorized,  let  us  say,  capital  stock  to 
the  amount  of  $1,000,000.  This  consisted  of  10,000  shares,  par 
value  $100.  The  stock  was  issued  to  themselves  part-paid  ($10 
per  share),  $100,000  in  all  being  temporarily  borrowed  by  them 
individually  for  the  purpose.  A  glowing  prospectus  then  offered 
for  sale  two  millions  of  bonds  with  the  proceeds  of  which  the 
road  was  to  be  built.  These  bonds  were  sold  at  80,  with  perhaps 
a  bonus  of  stock  thrown  in,  thus  realizing  $1,600,000  in  cash. 
From  this  the  promoters  reimbursed  themselves  for  the  $100,000 
already  advanced,  by  charging  a  5  per  cent  commission  for 
marketing  the  bonds.  This  enabled  them  to  pay  off  their  personal 
loans.  It  left  $1,500,000  cash  in  the  treasury  of  the  railway 
corporation  as  well  as  a  controlling  portion  of  its  own  capital 
stock.  The  next  step  was  the  organization  by  these  same  direct- 
ors of  a  construction  company,  which  built  the  road  for  an 
actual  outlay  of  $1,200,000.  The  railway  directors  now  voted 
to  pay  their  construction  company  $1,500,000  in  cash  for  this 
work  and  in  addition  the  remainder  of  the  share  capital  of  the 
road.  A  profit  to  themselves  of  $300,000  plus  the  prospective 
value  of  the  capital  stock,  which  had  cost  them  nothing,  obviously 
resulted.  If  the  enterprise  were  henceforth  profitably  operated, 
all  well  and  good.  If  not,  it  might  fail  even  to  pay  interest  on 
its  bonds.  If  bankruptcy  ensued,  a  receiver,  possibly  represent- 
ing the  old  stockholders  rather  than  the  bondholders,  was  ap- 
pointed. In  any  event  the  promoters  had  realized  300  per  cent 
on  their  first  investment,  itself  borrowed,  from  the  profits  of  the 
construction  company.  Moreover,  they  still  controlled  the  rail- 
road through  its  capital  stock.  Thus  were  the  foundations  of  a 
number  of  large  fortunes  laid — enough,  that  is  to  say,  to  envelop 
American  railroad  construction  in  an  atmosphere  of  disrepute  by 
no  means  generally  deserved.4 

*W.  Z.  Ripley,  Railroads:  Finance  and  Organization,  18. 


42  Railway  Regulation 

THE  BEGINNINGS  OF  KEGULATION 
CHANGES  IN  PUBLIC  POLICY 

The  change  in  public  attitude  towards  the  railways 
manifested  itself  in  other  ways  than  by  the  mere  relin- 
quishment  of  the  policy  of  public  aid.  Late  in  the  sixties 
the  dissatisfaction  and  evils  incident  to  the  adjustment  of 
railway  rates  began  to  attract  general  attention  and  to 
form  the  basis  of  popular  discussion.  In  some  measure 
these  evils  had  already  existed  for  a  number  of  years, 
but  it  was  not  until  after  the  close  of  the  Civil  War  that 
they  aroused  widespread  indignation. 

In  the  early  days  the  public  had  enthusiastically  sup- 
ported railway  enterprise,  for  it  saw  only  the  progress 
and  the  enlarged  opportunities  which  followed  railroad 
building ;  but  when  the  roads  were  built  and  ample  facili- 
ties were  provided,  the  people  came  gradually  to  learn 
that  those  in  control  of  the  railways  occupied  positions  of 
extraordinary  power,  and  that  the  manner  in  which  this 
power  was  exercised  was  not  always  conducive  to  the 
general  good.  Complaints  arose  in  greater  and  greater 
number  against  the  burdens  of  excessive  railway  charges 
and  against  the  dangers  of  monopoly  control  in  private 
hands.  A  spirit  of  hostility  began  to  be  manifested 
against  railroad  companies ;  the  railway  owners,  who  had 
once  been  looked  upon  as  public  benefactors,  began  to  be 
denounced  in  unsparing  terms. 

The  truth  is  simply  that  the  inevitable  had  happened. 
The  railway  was  now  old  enough  to  indicate  its  immense 
power  over  the  social,  political,  and  industrial  life  of  the 
nation,  and  the  nature  of  the  railway  business  was  such 
that,  if  the  railways  were  left  entirely  in  private  hands, 
the  public  interest  must  necessarily  be  jeopardized.  As 
this  truth  forced  itself  upon  the  minds  of  the  people,  the 


American  Railway  Development  43 

subject  of  public  aid  was  forgotten,  and  there  arose  in 
its  stead  an  insistent  demand  for  government  regulation 
of  railways.  So  effective  was  this  agitation  that  several 
states  immediately  established  systems  of  public  control ; 
and  so  persistent  have  been  the  evils  involved  in  the 
adjustment  of  rates  and  service  that  the  precedent  set  in 
the  early  seventies  by  a  few  of  the  states  has  been  fol- 
lowed by  the  nation  and  by  nearly  all  of  the  state 
governments. 

THE  METHODS  OF  PUBLIC  CONTROL 

When  the  American  people  became  aware  of  the  exist- 
ence of  pressing  evils  in  the  administration  of  our  rail- 
ways, they  might  have  adopted  any  one  of  several 
different  methods  as  a  means  of  meeting  the  situation. 
On  the  one  hand,  they  might  have  placed  their  reliance 
upon  the  potency  of  competition  for  the  establishment  of 
desirable  conditions  in  the  railway  business.  To  no  small 
extent  the  popular  agitation  directed  itself  to  the  main- 
tenance of  railway  competition.  But  while  this  plan  once 
had  numerous  advocates,  and  still  has  not  a  few,  they 
have  rapidly  diminished  in  number  as  the  realization  has 
been  forced  upon  them  that  competition  itself  is  responsi- 
ble for  much  of  the  difficulty,  because  of  the  abnormal 
form  which  it  assumes  in  connection  with  railway  enter- 
prise. 

On  the  other  hand,  as  another  possible  extreme,  the 
people  might  have  adopted  public  ownership  as  a  solu- 
tion of  the  evils  springing  from  private  manage- 
ment; but  a  change  of  so  radical  a  character  was  not 
permitted  or  seriously  considered  by  the  spirit  of  con- 
servatism which  prevails  in  our  political  affairs. 

Between  these  two  extremes  two  middle  courses  were 
possible :  one,  to  rely  upon  the  common  law  for  the  redress 


44  Railway  Regulation 

of  injuries  inflicted  by  railway  misdeeds;  and  the  other, 
to  establish  a  system  of  government  regulation. 

The  first  of  these  did  not  promise  adequate  relief.  In 
the  matter  of  discrimination  there  was  some  question 
whether  the  common  law  imposed  emphatic  prohibition ; 
the  courts,  moreover,  do  not  possess  the  necessary 
machinery  for  enforcement.  Against  the  practice  of 
extortion  the  relief  of  the  common  law  was  likewise  inade- 
quate. It  is  true  that  the  law  imposed  upon  common 
carriers  the  duty  of  providing  transportation  at  reason- 
able rates,  but  here  again  machinery  of  enforcement  was 
lacking  as  before. 

The  only  remedy  open  to  a  shipper  who  had  been  forced 
to  pay  an  exorbitant  rate  was  to  sue  for  recovery  of  the 
excess  payment.  Such  suits  could  not  be  relied  upon  to 
provide  adequate  protection  for  the  public,  for  the  amount 
to  be  recovered  by  the  particular  shipper  would  neces- 
sarily be  small,  and  the  expense  and  delays  incident  to 
litigation  would  frequently  prevent  shippers  from  avail- 
ing themselves  of  this  remedy.  Moreover,  even  if  dam- 
ages were  recovered,  the  railway  would  still  be  free  to 
repeat  the  offense  in  the  future.  The  only  effective  alter- 
native open  for  the  people,  then,  was  the  establishment  of 
a  system  of  public  supervision  and  control. 

THE    APPEARANCE    OF    RAILWAY   ABUSE 

Such  a  system  of  government  regulation  was  first 
established  in  the  states  of  the  middle  west — in  Illinois, 
Wisconsin,  Minnesota,  Iowa,  and  Missouri.  These  states 
were  the  leaders  in  railway  regulation  because  it  was  in 
their  borders  that  railway  abuses  first  became  so  numer- 
ous and  so  oppressive  as  to  provoke  a  strong  anti-railway 
sentiment.  In  the  late  sixties  and  the  early  seventies  the 
population  in  these  states  was  comparatively  sparse  and 


American  Railway  Development  45 

scattered.  Railway  traffic,  therefore,  was  light,  and  hauls 
were  long.  As  a  result  the  railways  were  driven  to 
increase  their  revenues  by  charging  high  rates  wherever 
it  was  possible  to  do  so.  Moreover,  new  lines  were  being 
built  with  greater  rapidity  than  the  industrial  condition 
of  the  country  required,  so  that  an  intense  rivalry  for 
traffic  was  developed,  resulting  in  local  favoritism  and 
the  general  disregard  of  distance  as  an  element  in  rate- 
making.  Complaints  of  extortion  and  discrimination 
thus  became  common  and  resentment  against  the  railways 
was  everywhere  nourished. 

There  were  other  causes,  too,  which  conspired  with 
these  rate  abuses  to  create  a  hostile  feeling.  The  rail- 
ways were  owned  to  a  large  extent  by  eastern  or  Euro- 
pean capitalists  who  "were  regarded  by  the  farmer  as 
the  absentee  land-owner  is  regarded  by  the  Irish  tenantry. 
Whatever  was  paid  to  the  railroad-owner  seemed  like  so 
much  direct  drain  on  the  resources  of  the  community. "  5 
There  was  also  the  widely  prevalent  idea  that,  because 
rival  roads  voluntarily  fixed  a  given  rate  between  com- 
peting points,  they  could  necessarily  afford  to  carry  for 
that  rate,  and  hence  for  much  lower  rates  between 
intermediate  points.  The  feeling  spread,  therefore,  that 
most  of  the  farmers  were  being  made  the  victims  of  the 
greed  of  railroad-owners ;  and  the  decline  in  the  prices  of 
agricultural  products  made  them  feel  the  burden  of  trans- 
portation rates  even  more  heavily. 

THE  GRANGER  LEGISLATION 

These  conditions  produced  in  the  middle  west  a  wide- 
spread agitation  for  government  regulation  of  railroad 
rates.  This  cause  was  espoused  by  the  farmers' 
granges,  so  that  the  entire  agitation  came  to  be  known 

5  A.  T.  Hadley,  Eailroad  Transportation,  133. 


46  Railway  Regulation 


as  the  Granger  Movement  and  the  laws  in  which  it  cul- 
minated as  the  Granger  Legislation.  This  legislation, 
which  was  enacted  between  1871  and  1875,  established  a 
system  of  public  control  in  which  reliance  was  placed  in 
part  upon  commissions  and  in  part  upon  the  force  of 
statutory  provisions. 

The  idea  of  railroad  regulation  through  commissions 
was  not  a  new  one :  for  some  thirty  years  a  few  commis- 
sions had  existed  in  the  eastern  states.  The  powers  of 
these  commissions  had  been  very  limited  in  their  scope. 
As  a  general  rule  their  duties  were  confined  to  the  inspec- 
tion of  the  physical  properties  of  railways  for  the  purpose 
of  preventing  accidents,  the  collection  of  statistics,  and 
the  investigation  of  alleged  violations  of  the  law  or  of 
the  charter  provisions.  At  first  they  possessed  no 
authority  over  rates,  but  with  the  development  of  abuses 
connected  with  rates,  and  especially  with  the  growth  of 
anti-railway  agitation,  it  was  seen  to  be  necessary  to 
clothe  these  commissions  with  some  power  of  rate-control. 

In  the  beginning  the  Granger  states  were  disposed  to 
rely  upon  direct  legislative  regulation  rather  than  upon 
the  activities  of  administrative  commissions.  Statutes 
were  enacted  which  forbade  extortion  and  unjust  dis- 
crimination, making  such  practices  penal  offenses, 
and  prescribed  schedules  of  maximum  rates  to  be 
observed  by  the  railroads.  The  general  prohibitory 
clauses  have  been  permanently  retained  in  the  present 
railway  legislation  of  all  the  states;  the  maximum  rate 
provisions  have  been  abandoned  in  many  of  the  states 
and  superseded  by  new  enactments  in  others.  On  the 
whole,  the  tendency  of  the  Granger  Legislation  was  to 
make  the  work  of  commissions  the  chief  feature  of  their 
systems,  confining  their  direct  rate  legislation  to  general 


American  Railway  Development  47 

provisions  prohibiting  unreasonable  and  discriminatory 
rates  and  practices. 

THE  ATTITUDE  OF  THE  RAH, WAYS 

The  attitude  of  the  railways  towards  this  complete 
reversal  of  governmental  policy — from  the  practice  of 
public  aid  to  the  enforcement  of  public  control — was  nat- 
urally one  of  resentment  and  opposition.  Their  protests 
were  vigorous  and  bitter ;  they  denounced  the  legislation 
on  manifold  grounds.  They  denied  that  the  state  pos- 
sessed any  rightful  authority  to  regulate  rates;  they 
asserted  that  the  states  had  violated  the  rights  guaran- 
teed to  the  railways  by  their  corporate  charters;  they 
assailed  the  laws  as  unwarranted  attempts  to  regulate 
interstate  as  well  as  local  commerce;  and  they  asserted 
that  the  rates  fixed  by  law  were  so  low  that  they  would 
prove  ruinous,  depriving  the  railway-owners  of  any 
return  on  their  investment,  discouraging  further  capital 
from  the  field  of  railway  enterprise,  bringing  railway 
construction  to  a  standstill,  and  seriously  crippling 
American  industry. 

In  spite  of  this  vigorous  and  varied  attack,  the  rail- 
ways received  very  little  relief  through  judicial  channels ; 
the  legality  of  the  legislation  was  very  generally  upheld. 
Nor,  in  all  probability,  would  the  railway  protest  have 
produced  much  effect  upon  the  public  mind,  if  extraor- 
dinary circumstances  had  not  arisen.  But  a  severe  panic 
occurred  in  1873,  followed  by  a  long  period  of  depression. 
During  this  period  all  forms  of  business  enterprise, 
including  railway  construction,  were  seriously  curtailed. 
The  idea  was  suggested,  and  was  diligently  fostered  by 
those  interested,  that  the  Granger  Legislation  had  caused 
the  cessation  of  railway  extension.  This  was  true  in 
some  small  measure,  in  so  far  as  capital  was  watching  the 


48  Railway  Regulation 

effects  of  the  new  laws ;  but  for  the  most  part  the  situation 
in  the  railway  field  was  merely  a  phase  of  that  affecting 
all  business.  Nevertheless  these  unusual  conditions 
resulted  in  temporarily  abating  the  vigor  of  government 
regulation.  There  was  some  reaction  in  public  sentiment 
from  the  extreme  to  which  it  had  gone;  some  leniency 
was  shown  in  the  enforcement  of  the  laws;  and  a  few 
states — Wisconsin,  Iowa,  and  Minnesota — relaxed  their 
rigorous  systems  of  control  and  placed  the  supervision  of 
railways  in  the  hands  of  commissions  with  only  advisory 
powers  as  to  rates. 

This  relaxation,  however,  was  only  temporary.  The 
movement  for  railway  regulation  has  made  irresistible 
headway,  so  that  today  it  is  nation-wide  and  thorough- 
going. It  may  be  noted  further  that  the  carriers  as  a 
whole  not  only  follow  the  letter  of  the  various  orders  of 
the  regulating  bodies,  state  and  interstate,  but  concede 
that  regulation  is  beneficial  to  them.  The  chapters  that 
follow  are  devoted  to  a  more  detailed  consideration  of 
the  nature  and  extent  of  this  regulation. 

TEST  QUESTIONS 

1.  Describe  very  briefly  the  development  of  American  railway 
transportation. 

2.  In  what  ways  has  the  public  aided  in  the  construction  of 
railways  in  this  country  in  the  past? 

3.  Why  did  speculation  naturally  enter  into  the  construction 
of  some  of  our  earlier  railways? 

4.  How  were  construction  companies  utilized  in  financing  some 
of  our  early  roads  ? 

5.  Trace  briefly  the  events  which  led  up  to  the  regulation  of 
railways  in  this  country. 

6.  What  was  the  first  attitude  of  the  railways  towards  regula- 
tion? 


CHAPTER  IV 
RAILWAY  COMPETITION 

THE  NATURE  OF  RAILWAY  COMPETITION 
RAILWAY  COMPETITION  AND  ITS  EFFECTS 

We  have  seen  in  an  earlier  chapter  that  the  railway 
business  may  be  said  to  be  naturally  monopolistic.  In 
local  traffic 1  the  railways  often  possess  an  absolute 
monopoly,  the  shipper  being  dependent  for  his  service 
upon  a  single  line  of  railway.  But  even  in  competitive 
traffic  the  railways  tend  to  be  operated  under  monopolistic 
conditions  because  of  the  peculiar  nature  of  railway  com- 
petition. 

The  abnormal,  ruinous,  self-destructive  character  of 
railway  competition  rests  upon  the  economic  characteris- 
tics of  the  railway  business.  From  one-half  to  three-quar- 
ters of  railway  expenditures  are  both  joint  and  constant, 
thus  making  it  practically  impossible  to  ascertain 
the  exact  cost  of  a  specific  service  and  creating  an  abnor- 
mal rivalry  for  railroad  traffic.  Destructive  rate  wars 
and  ruinous  as  well  as  unjust  discriminatory  practices 
are  the  inevitable  results.  Because  of  the  specialized 
character  of  railway  property  abandonment  of  the  field 
is  impossible;  even  insolvency,  therefore,  only  brings  a 
reorganization  under  which  the  weaker  rival  is  absorbed 

i  The  term  ' '  local  traffic ' '  as  here  used  signifies  traffic  at  a  point 
served  by  only  one  railroad. 

49 


50  Railway  Regulation 


by  the  stronger  one.  In  most  cases  there  is  an  irresistible 
stimulus  to  resort  to  some  form  of  co-operation  before 
the  almost  certain  outcome  of  active  rivalry  drives  com- 
peting railways  to  merge  their  interests. 

Effective  competition,  then,  in  the  sense  in  which  it 
appears  in  ordinary  industrial  enterprise  (and  in  which 
it  is  said  to  be  "the  life  of  trade "),  cannot  be  said  to 
exist  in  railway  transportation  as  an  automatic  safeguard 
of  public  welfare.  Indeed,  it  tends  to  produce  evils  more 
grave  and  more  injurious  to  the  public  interest  than  those 
which  it  is  relied  upon  to  eliminate. 

COMPETITION  IN  TEADE  AND  IN  TRANSPORTATION  COMPARED 

The  true  nature  of  railway  competition  emerges  the 
more  clearly  when  it  is  compared  concretely  with  com- 
petition in  trade.  The  following  analysis  by  President 
Hadley,  of  Yale  University,  presents  such  a  concrete 
application  of  the  principles  under  discussion: 

There  is  a  marked  difference  of  principle  between  mercantile 
competition  and  the  competition  of  railroads.  In  the  former 
case  its  action  is  prompt  and  healthful,  and  does  not  go  to 
extremes.  If  Grocer  A  sells  goods  below  cost,  Grocer  B  need 
not  follow  him,  but  simply  stop  selling  for  the  time.  For:  (1) 
This  involves  no  great  present  loss  to  B ;  when  his  receipts  stop, 
most  of  his  expenses  stop  also.  (2)  It  does  involve  a  present  loss 
to  A;  if  he  is  selling  below  cost,  he  loses  more  money  the  more 
business  he  does.  (3)  It  cannot  continue  indefinitely.  If  A  re- 
turns to  paying  prices,  B  can  again  compete.  If  A  continues  to 
do  business  at  a  loss,  he  "will  become  bankrupt,  and  B  will  find  the 
field  clear  again.  But  if  railroad  A  reduces  charges  on  com- 
petitive business,  railroad  B  must  follow.  (1)  It  involves  a 
great  present  loss  to  stop.  If  a  railroad's  business  shrinks  to 
almost  nothing,  a  large  part  of  its  expenses  run  on  just  the 
same.  Interest  charges  accumulate;  office  expenses  cannot  be 


Railway  Competition  51 

suddenly  contracted;  repairs  do  not  stop  when  traffic  shrinks, 
for  they  are  rendered  necessary  by  weather  as  well  as  by  wear. 
(2)  If  B  abandons  the  business,  A's  reduction  of  rates  will  prove 
no  loss.  The  expense  of  a  large  business  is  proportionately  less 
than  that  of  a  small  one.  A  rate  which  was  below  cost  on 
100,000  tons  may  be  a  paying  one  on  200,000.  (3)  Profitable 
or  not,  A 's  competition  may  be  kept  up  indefinitely.  The  prop- 
erty may  go  into  bankruptcy,  but  the  railroad  stays  where  it  is. 
It  only  becomes  a  more  reckless  and  irresponsible  competitor. 
The  competition  of  different  stores  finds  a  natural  limit :  it  brings 
rates  down  near  to  cost  of  service  and  then  stops.  The  compe- 
tition of  railroads  finds  no  such  natural  limit.  Wherever  there 
is  a  large  permanent  investment,  and  large  fixed  charges,  compe- 
tition brings  rates  down  below  cost  of  service.  The  competitive 
business  gives  no  money  to  pay  repairs  or  interest.  Sometimes 
the  money  to  pay  for  these  things  comes  out  of  the  pockets  of 
other  customers  who  do  not  enjoy  the  benefit  of  the  competition 
and  are  charged  much  higher  rates.  Then  we  have  the  worst 
forms  of  discrimination.  Sometimes  the  money  cannot  be  ob- 
tained from  any  customers  at  all.  Then  we  have  bankruptcy, 
ruin  to  the  investor,  and — when  these  things  happen  on  a  large 
scale — a  commercial  crisis.2 

THE  FOKMS  OF  RAILWAY  COMPETITION 
VAKIETTES  OF  COMPETITION  IN  TEANSPOKTATION 

Railway  competition,  or  rather  competition  in  trans- 
portation, assumes  many  forms.  There  is  competition 
between  parallel  railway  lines;  between  railways  and 
river,  canal,  or  ocean  carriers ;  between  railways  serving 
the  shipper  and  consumer  by  the  shortest  or  most  direct 
route  and  railways  or  other  carriers  serving  the  shipper 
and  consumer  by  indirect,  circuitous,  or  roundabout 
routes;  between  service  or  facilities  furnished  by  differ- 

2  A.  T.  Hadley,  Railroad  Transportation,  73-74. 


52  Railway  Regulation 


ent  railways  or  other  carriers;  between  different  cities 
seeking  to  establish  their  superiority  as  commercial  or 
industrial  centers  with  respect  to  one  another ; 3  between 
different  producing  centers  in  this  country  and  abroad 
seeking  to  reach  the  same  markets  for  the  distribution 
of  their  products.  The  most  important  of  these  forms 
of  competition  are  competition  of  routes,  including  direct 
rivalry  between  parallel  lines,  and  competition  of  mar- 
kets. 

Market  or  commercial  competition  involves  primarily 
rivalry  between  producers  and  not  between  transporta- 
tion agencies.  In  the  words  of  the  Industrial  Commis- 
sion: 

It  represents  the  attempt  of  rival  producers,  or  of  rival 
jobbers  and  distributing  agents  of  different  sections,  to  extend 
their  influence  throughout  a  consuming  territory.  The  back- 
bone of  the  railroad  adjustment  throughout  the  United  States 
lies  in  the  rivalry  between  the  Atlantic  or  eastern  trade  centers 
and  the  western  cities  for  the  remunerative  trade  of  the  southern 
states.  The  Texas  market  is  competed  for  by  all  the  distributive 
centers  between  Kansas  City  and  Boston.  The  fruit-growers  of 
California  and  of  Florida  are  respectively  competing  for  markets 
throughout  the  United  States,  and  particularly  in  the  northeast. 
Such  competition  recognizes  no  national  bounds.  Copper  from 
Montana  must  be  transported  at  rates  which  will  permit  of 
meeting  the  price  on  Chile  bars  in  the  Liverpool  market.  Our 
entire  grain  and  cotton  crops  must  be  transported  at  rates  which 
will  enable  them  to  hold  their  precedence  in  Europe.  The  cotton- 
mills  in  New  England  and  in  the  South  must  have  their  output 
carried  to  China  under  conditions  which  will  enable  them  to 
meet  the  price  made  by  the  British  manufacturer.4 

s  A  witness  before  the  Industrial  Commission  thus  tersely  described  the 
competition  of  cities:  "It  is  a  continual  struggle  between  the  line  from 
Kansas  City  to  St.  Louis  with  no  interest  in  Chicago,  and  the  line  from 
Kansas  City  to  Chicago  with  no  interest  in  St.  Louis. ' ' — Report  of  Industrial 
Commission,  Vol.  19,  p.  357. 


Railway  Competition  53 

COMPETITION  OF  MARKETS  AND  COMPETITION  OF  ROUTES 

The  existence  of  market  competition  is  a  fundamental 
factor  in  the  adjustment  of  the  American  rate  structure. 
The  recognition  of  its  importance  underlies  the  general 
disregard  of  distance  which  characterizes  our  railway 
rates,  and  it  is  the  basis  of  the  thousands  of  special  or 
commodity  tariffs  under  which  about  three-fourths  of  our 
railway  traffic  is  carried.  The  influence  of  market  or 
commercial  competition  is  both  vital  and  permanent  in 
the  administration  of  railway  enterprise.  But  it  is  the 
attempt  of  the  public  to  establish  permanent  competition 
between  transportation  agencies,  as  it  appears  in  the  indi- 
rect rivalry  of  competing  routes  and  especially  in  the 
direct  competition  of  parallel  lines,  which  presents  the 
chief  problem  in  railway  competition  from  the  standpoint 
of  railway  regulation.  It  is  with  this  aspect  of  competi- 
tion, and  the  attitude  of  the  state  toward  it,  that  we  are 
here  chiefly  concerned,  for  such  maintenance  of  competi- 
tion by  the  government  runs  counter  to  the  natural 
tendency  to  co-operation  by  the  railways.5 

RAILWAY  CO-OFEEATION  AND  CONSOLIDATION 

AGREEMENTS  TO  MAINTAIN  RATES 

We  have  seen  that  railway  competition  leads  to  unre- 
strained rivalry,  harmful  alike  to  the  railroads  and  to 
the  public.  To  safeguard  themselves  against  the  evils  of 
abnormal  competitive  conditions,  the  railways  have 
resorted  to  various  methods  of  co-operation.  The  first 

5  The  practical  importance  of  the  various  forms  of  competition  in  the 
development  of  the  rate  structures  in  this  country  is  well  explained  in  the 
treatises  on  Freight  Rates,  Official,  Southern,  and  Western  territories, 
respectively,  which  are  a  part  of  the  course  in  Interstate  Commerce  and 
Railway  Traffic. 


54  Railway  Regulation 


and  simplest  of  these  methods  was  the  agreement  to  main- 
tain rates.  Under  these  agreements  the  struggle  for 
traffic  continued  as  before,  each  railway  securing  as  much 
business  as  possible,  but  the  expedient  of  rate-cutting 
could  not  be  resorted  to  as  a  means  of  obtaining  increased 
traffic.  In  so  far  as  these  agreements  to  maintain  rates 
were  enforced,  therefore,  the  competitive  emphasis  was 
shifted  from  rates  to  service.  But  for  the  most  part  this 
method  of  co-operation  proved  ineffective,  for  the  incen- 
tive to  break  the  agreements,  and  thereby  increase  net 
revenues  unduly,  was  very  strong,  and  enforcing  machin- 
ery, legal  or  administrative,  was  entirely  lacking. 

POOLING  ARRANGEMENTS 

The  next  method  of  co-operation  resorted  to  by  the 
railways  was  the  pooling  agreement.  Its  essential  char- 
acteristics have  been  described  as  follows : 

A  railroad  pool  is  nothing  more  nor  less  than  an  agreement 
among  the  several  parties  concerned  that  each  will  accept  a 
certain  percentage  of  the  entire  traffic,  which  shall  be  guaranteed 
to  it  by  the  other  roads.  This  guarantee  obviates  at  once  the 
necessity  for  urgently  soliciting  business  by  cutting  rates,  and 
at  the  same  time  it  nullifies  the  threat  of  the  large  shipper  to 
divert  his  tonnage  from  a  road  which  refuses  to  grant  him  such 
concessions  as  he  sees  fit  to  ask.6 

The  object  of  the  railway  pools  was  to  prevent  the  cut- 
ting of  rates  and  to  establish  such  conditions  as  would 
enable  the  railroads  to  maintain  stable  and  reasonable 
charges.  These  pools  were  of  two  kinds,  (1)  traffic  pools 
and  (2)  money  pools. 

In  the  traffic  pools  each  member  of  the  agreement  was 
guaranteed  a  definite  percentage  of  the  business,  this  per- 

•  Eeport  of  Industrial  Commission,  Vol.  19,  p.  331. 


Railway  Competition  55 

centage  being  based  upon  the  average  traffic  of  the  given 
carrier  over  a  period  of  years.  If  one  railroad  failed  to 
secure  its  allotted  proportion  of  traffic,  enough  tonnage 
was  diverted  from  other  railroads,  which  carried  more 
than  their  allotted  percentage,  to  satisfy  the  original 
apportionment.  The  operation  of  these  traffic  pools, 
involving  the  diversion  of  freight  from  one  road  to 
another,  vested  in  the  railroads  the  power  of  determining 
the  routing  of  goods  and  not  infrequently  aroused  the 
opposition  of  shippers.  Pooling  agreements  whereby  the 
revenue  from  operation  rather  than  the  business  itself 
was  apportioned  on  an  agreed  basis  were  therefore  more 
usually  relied  upon. 

In  the  money  pools  each  member  of  the  agreement  was 
guaranteed  a  certain  percentage  of  the  revenue  accruing 
from  the  business  pooled,  this  percentage,  as  before,  being 
based  upon  the  normal  traffic  of  the  given  carrier  over  a 
period  of  years,  and  not  upon  the  actual  amount  of  busi- 
ness done  during  the  life  of  the  agreement.  From  the 
gross  revenue  of  each  road  an  amount  varying  from  20  to 
50  per  cent  was  deducted  as  an  allowance  for  the  cost  of 
conducting  transportation,  and  the  remainder  was  turned 
into  the  pool  for  distribution  in  accordance  with  the  fixed 
apportionment.  The  disinclination  of  roads  earning  more 
than  their  allotted  percentages  to  turn  this  excess  into  the 
pool  for  the  benefit  of  the  less  successful  roads  was 
largely  overcome  by  the  requirement  that  railroads  should 
deposit  in  advance  an  amount  of  money  from  which  the 
necessary  adjustments  might  be  made. 

Although  there  was  some  temptation  to  violate  the 
pooling  agreements  by  cutting  rates,  in  order  that  a 
road's  increased  business  might  strengthen  its  claim  for 
a  larger  percentage  of  the  traffic  or  revenue  when  the 
time  for  reapportionment  came,  this  method  of  railway 


56  Railway  Regulation 

co-operation  was  wide-spread  and  effective.  During  the 
seventies  practically  every  important  railroad  in  the 
United  States  was  allied  with  some  kind  of  pooling  organ- 
ization. The  transition  from  this  type  of  organization 
to  the  present  forms  of  combinations  may  now  be  traced. 

THE  IMPETUS   TO   CONSOLIDATION 

The  superiority  of  the  pool  over  the  simple  agreement 
to  maintain  rates  lay  chiefly  in  the  administrative  machin- 
ery which  it  provided  for  the  enforcement  of  its  pro- 
visions. From  the  legal  standpoint  pooling  agreements 
were  as  invalid  and  unenforceable  as  simple  agreements 
to  maintain  rates.  The  effectiveness  of  both  of  these 
methods  of  co-operation  was  dependent  upon  the  honor  of 
the  parties  to  the  agreement,  the  courts  refusing  to  lend 
the  authority  of  the  state  in  aid  of  their  enforcement,  on 
the  ground  that  they  were  contrary  to  public  policy. 

When,  therefore,  as  we  shall  see  in  succeeding  para- 
graphs, pooling  was  prohibited  by  the  Act  to  Regulate 
Commerce,  and  agreements  to  maintain  rates  were  con- 
strued as  falling  within  the  condemnation  of  the  Sherman 
Anti-Trust  Act,  competing  railways  were  forced  to 
resort  to  unity  of  management  and  control  as  a  means  of 
securing  the  necessary  co-operation.  There  is  hardly  any 
question  that  the  movement  toward  actual  consolidation, 
which  became  so  rapid  after  1898,  was  substantially 
hastened  by  the  attitude  of  the  law  toward  the  simpler 
and  less  formal  methods  of  railway  co-operation.  "What, 
then,  more  concretely,  is  the  attitude  of  the  law  toward 
railway  competition  and  what  efforts  were  made  by  the 
carriers  to  avoid  its  pitfalls  ? 


Railway  Competition  57 

THE  LEGAL  VALIDITY  OF  CO-OPERATIVE  EFFORT 
PUBLIC  DISTRUST  OF  MONOPOLY 

From  the  earliest  times,  English  thought  has  looked 
upon  private  monopoly  as  prejudicial  to  public  welfare, 
and  the  common  law  has  discouraged  all  arrangements 
tending  to  establish  or  to  strengthen  private 'monopoly. 
This  attitude  has  been  uniformly  enforced  by  our  Amer- 
ican courts.  Contracts  in  restraint  of  trade,  therefore, 
in  so  far  as  they  tend  to  substitute  the  arbitrary  arrange- 
ments of  producers  and  sellers  in  the  determination  of 
the  level  of  prices  and  the  quality  of  service  in  place  of 
the  normal  competitive  forces,  have  been  held  illegal  and 
unenforceable.  Such  contracts  are  considered  contrary 
to  public  policy  and  are  therefore  made  invalid  by  the 
illegality  of  their  object.  But,  while  the  courts  would 
not  lend  their  aid  in  the  enforcement  of  such  agreements 
or  arrangements,  there  was  no  express  prohibition  of 
such  contracts,  with  penalties  to  be  imposed  upon  those 
entering  into  them.  In  other  words,  there  were  no  posi- 
tive legal  obstacles  to  the  formation  of  such  contracts, 
but  in  their  enforcement  reliance  had  to  be  placed  upon 
the  honor  of  the  individuals  and  the  deposit  of  for- 
feitures, rather  than  upon  the  ordinary  legal  machinery. 
As  one  court  expressed  it,  "We  shall  decline  enforcing 
such  contracts.  If  parties  see  fit  to  invest  money  in  such 
ventures,  they  must  get  it  back  by  some  other  than  legal 
measures.  "7 

It  was  by  these  principles  of  common  law  that  the  legal- 
ity of  agreements  to  maintain  rates  and  pooling  arrange- 
ments was  originally  tested.  These  methods  of 
co-operation  could  be  entered  into  freely,  although  no 
legal  remedy  was  available  against  those  individuals  or 

TKaymond  v.  Leavitt,  46  Mich.  447. 


58  Railway  Regulation 

corporations  who  saw  fit,  from  motives  of  private  inter- 
est, to  violate  the  terms  of  their  undertakings.  The  pool 
was  resorted  to  more  frequently  than  the  simple  agree- 
ment, but  merely  because  of  its  superior  administrative 
effectiveness.  This  was  the  situation  to  1887  when  the 
Act  to  Eegulate  Commerce  was  passed  by  the  federal 
government. 

THE  PBOHIBITION  OF  POOLING 

The  Act  to  Eegulate  Commerce  made  pooling  illegal 
in  a  much  wider  sense  than  it  had  been  at  common  law, 
for  it  actually  prohibited  such  arrangements  instead  of 
merely  considering  them  invalid  as  theretofore.  Section 
five  of  the  Act  provides  '  *  that  it  shall  be  unlawful  for  any 
common  carrier  subject  to  the  provisions  of  the  Act  to 
enter  into  any  contract,  agreement  or  combination  with 
any  other  common  carrier  or  carriers  for  the  pooling  of 
freights  of  different  and  competing  railroads,  or  to  divide 
between  them  the  aggregate  or  net  proceeds  or  the  earn- 
ings of  such  railroads,  or  any  portion  thereof. ' ' 

The  pooling  agreements  that  were  so  wide-spread  up 
to  1887  had  been  carried  out  very  largely  through  traffic 
associations  organized  in  all  parts  of  the  country.  These 
traffic  associations  now  had  to  be  reorganized  in  such 
fashion  as  to  eliminate  the  pooling  features  prohibited 
by  the  fifth  section  of  the  Act.  Since,  however,  co-opera- 
tion between  competing  railways  was  still  deemed  neces- 
sary because  of  the  very  nature  of  the  railway  business, 
these  associations  began  to  revert  to  mere  rate  agree- 
ments, without  the  added  administrative  safeguards  to 
be  derived  from  the  actual  pooling  of  freight  or  revenue. 

Prior  to  1887,  then,  both  pools  and  simple  agreements 
had  been  allowed ;  after  1887  pooling  was  prohibited,  but 
agreements  to  maintain  rates  were  still  considered  lawful. 


Railway  Competition  59 

This  situation  continued  for  a  decade.  A  decision  of  the 
Supreme  Court  bringing  railroads  under  the  prohibitions 
of  the  anti-trust  act  then  deprived  them  also  of  this 
method  of  co-operation. 

THE  KAILROADS  AND  THE  SHERMAN  ANTI-TRUST  ACT 

The  Sherman  Anti-Trust  Act,  passed  in  1890,  declared 
4  *  every  contract,  combination  in  the  form  of  trust  or 
otherwise,  or  conspiracy  in  restraint  of  trade  or  com- 
merce among  the  several  states  or  with  foreign  nations " 
to  be  illegal.  It  was  generally  believed  that  the  Sherman 
Act  had  been  passed  for  the  purpose  of  arresting  the 
so-called  trust  movement,  and  that  its  provisions  were 
therefore  applicable  merely  to  industrial  or  business  cor- 
porations. The  question  whether  railroads  fell  within 
the  scope  of  the  Act  was  definitely  settled  in  the  affirma- 
tive by  the  Supreme  Court  of  the  United  States  in  the 
Trans-Missouri  Freight  Association8  and  Joint  Traffic 
Association  9  cases  decided  in  1897  and  1898. 

In  the  Trans-Missouri  Freight  Association  case  there 
was  an  agreement  among  eighteen  railroads  whereby  an 
association  was  created  and  methods  were  provided  for 
fixing  the  rates  and  fares  on  competitive  interstate 
freight  traffic  south  and  west  of  the  Missouri  River.  The 
Association  was  declared  to  have  been  created,  among 
other  things,  "for  the  purpose  of  mutual  protection,  by 
establishing  and  maintaining  reasonable  rates. "  The 
two  lower  courts,  the  Circuit  Court  and  the  Circuit  Court 
of  Appeals,  upheld  the  legality  of  the  arrangement ;  but 
the  Supreme  Court,  by  a  five-to-four  decision,  declared 
the  Trans-Missouri  Freight  Association,  in  view  of  its 
purposes,  to  be  organized  in  violation  of  the  Sherman 
Anti-Trust  Act. 

s  United  States  v.  Trans-Missouri  Freight  Association,  166  \j.  S.  290. 
9  United  States  v.  Joint  Traffic  Association,  171  U.  S.  505, 


60  Railway  Regulation 

Two  important  principles  were  thus  established  by  the 
court ;  first,  that  the  anti-trust  act  applied  to  railroads  as 
well  as  to  industrial  corporations;  and  second,  that  all 
contracts  in  restraint  of  trade  or  commerce  among  the 
several  states  or  with  foreign  nations,  whether  reasonable 
or  unreasonable,  were  prohibited  by  the  Act. 

In  the  Joint  Traffic  Association  case  there  was  an  agree- 
ment among  thirty-two  railroads  whereby  an  association 
was  created  and  methods  were  provided  for  fixing  the 
rates  and  fares  on  competitive  interstate  traffic  east  of 
Chicago.  In  this  case,  too,  the  expressed  purpose  of  the 
Association  was  to  establish  and  maintain  "  reasonable 
and  just"  rates  and  fares.  The  Supreme  Court  confirmed 
the  decision  of  the  Trans-Missouri  case:  railroads  were 
held  subject  to  the  Act  and  the  reasonableness  or  unrea- 
sonableness of  the  restraint  was  declared  to  be  immate- 
rial. The  Court  said  (p.  575):  "The  natural,  direct, 
and  immediate  effect  of  competition  is  to  lower  rates,  and 
to  thereby  increase  the  demand  for  commodities,  the 
supplying  of  which  increases,  and  an  agreement,  whose 
first  and  direct  effect  is  to  prevent  this  play  of  competi- 
tion, restrains  instead  of  promoting  trade  and  com- 
merce. ' ' 

As  a  result  of  these  cases,  co-operative  action  on  the 
part  of  the  railroads  in  fixing  and  maintaining  rates,  even 
without  resort  to  actual  pooling  arrangements,  was  made 
unlawful.  It  was  this  legal  situation  which  lent  substan- 
tial impetus  to  the  process  of  consolidation  which  marked 
the  years  of  prosperity  at  the  close  of  the  nineteenth 
century. 

GOVERNMENT  REGULATION  AND  RAILWAY  CO-()PEBATION 

In  their  interpretation  of  the  Sherman  Anti-Trust  Act 
the  courts  have  exercised  their  authority  against  unlaw- 


Railway  Competition  61 

ful  restraint  of  trade  or  monopoly,  regardless  of  the 
method  or  form  of  organization  by  means  of  which  the 
prohibited  practices  were  employed.  Actual  consolida- 
tion between  competing  railway  lines  has  thus  been  no 
less  effectively  condemned  than  the  looser  agreements  of 
the  traffic  associations. 

The  most  important  and  widely  known  examples  of  the 
exercise  of  this  power  by  the  courts  are  the  dissolution 
of  the  merger  of  the  so-called  Hill  lines  through  the 
Northern  Securities  Company  and  the  dissolution  of  the 
merger  of  the  so-called  Harriman  lines  through  the  Union 
Pacific — Southern  Pacific  combination.  In  the  first  case, 
the  Northern  Securities  Company  was  a  holding  corpora- 
tion through  which  the  direct  competition  between  the 
Great  Northern  and  the  Northern  Pacific  companies  was 
to  be  eliminated.  In  the  second  case  the  less  direct  com- 
petition between  the  Union  Pacific  and  the  Southern 
Pacific  railroads,  as  well  as  their  subsidiaries,  was  to  be 
eliminated  by  a  merger  of  the  two  through  the  purchase 
by  the  Union  Pacific  company  of  a  controlling  interest 
in  the  capital  stock  of  its  competitors.  In  both  cases  a 
dissolution  was  ordered  on  the  ground  that  the  consolida- 
tion violated  the  prohibitions  of  the  anti-trust  act  against 
restraint  of  trade  and  monopoly.  The  resulting  inability 
of  competing  railways  to  consolidate  their  enterprise 
emphasizes  the  more  strongly  the  need  of  allowing  the 
railways  to  resort  to  the  methods  of  co-operation  which 
are  prohibited  by  the  anti-pooling  section  of  the  Act  to 
Regulate  Commerce. 

We  have  seen  that  unrestrained  competition  is  ruinous 
to  the  railways  and  harmful  to  the  public.  To  prevent 
the  instability  of  transportation  charges  which  springs 
from  general  rate-cutting  and  the  manifest  evils  which 
result  from  discriminatory  practices,  railway  co-opera- 


62  Railway  Regulation 

tion  is  necessary.  With  the  extensive  powers  of  control 
now  vested  in  the  Interstate  Commerce  Commission  and 
in  the  state  railroad  or  public  service  commissions  there 
is  little  danger  that  the  legalization  of  pooling  would  lead 
to  excessive  charges. 

There  is  an  almost  unanimous  demand,  therefore,  on 
the  part  of  commissions,  publicists,  and  students  of  rail- 
way economics,  as  well  as  by  the  railways  themselves, 
that  the  anti-pooling  section  of  the  Interstate  Commerce 
Act  be  repealed.  If  the  state  is  to  prevent  effectively 
the  evils  of  rate  wars  and  unjust  discriminations,  pooling 
arrangements  and  agreements  as  to  rates  must  be  recog- 
nized as  lawful.  To  prohibit  all  forms  of  co-operative 
effort  in  the  adjustment  of  rates  on  the  part  of  competing 
railways  is  to  intensify  one  of  the  fundamental  causes  of 
the  evil  sought  to  be  eradicated.  "The  law  undertakes 
to  enforce  two  lines  of  policy  which  will  not  run  together 
so  long  as  different  railroads  act  as  carriers  for  the  same 
territory."10 

Moreover,  we  find  at  the  present  time  that  in  spite  of 
the  fact  that  co-operation  between  carriers  is  for  the  most 
part  illegal,  the  railroads  have  found  it  absolutely  essen- 
tial to  work  together  by  means  of  voluntary  co-operative 
associations.  It  is  everywhere  conceded  that  much  is 
gained  on  all  sides  from  the  operation  of  these  associa- 
tions. If  American  railways  are  to  perform  their  func- 
tions properly,  the  activities  of  these  associations  must 
receive  full  legal  recognition,  and  the  scope  of  their  co- 
operative effort  must  be  substantially  extended. 


10  H.  E,  Seager,  Introduction  to  Economics  (3d  ed.),  470. 


Railway  Competition  63 

TEST  QUESTIONS 

1.  Mention  several  of  the  common  forms  of  competition  in 
transportation. 

2.  How  does  railway  competition  compare  with  industrial  com- 
petition ? 

3.  What  is  meant  by  a  railroad  pool  ? 

4.  Explain  two  kinds  of  railroad  pools. 

5.  What  causes  made  rate  agreements  and  pooling  arrange- 
ments ineffective  in  eliminating  the  evils  of  competition  ? 

6.  What  events  have  led  to  the  extensive  consolidation  of  rail- 
ways which  have  taken  place  in  recent  years? 

7.  How  does  the  Sherman  Anti-Trust  Act  affect  co-operation  of 
carriers  ? 

8.  Why  should  pooling  arrangements  and  rate  agreements  of 
carriers  be  made  lawful  ? 


CHAPTER  V 
THE  THEORY  AND  PRACTICE  OF  RATE-MAKING 

RATES  AND  REGULATION 

The  question  of  rates,  which  we  are  now  to  discuss,  is 
rightly  regarded  as  the  heart  of  the  railway  problem. 
It  is  through  the  adjustment  of  rates  that  the  tremendous 
power  of  the  railways  is  wielded  for  good  or  for  ill,  and 
it  is  in  connection  with  the  making  of  rates  that  the  great- 
est railway  evils  and  abuses — those  which  vitally  affect 
the  industrial,  social,  and  political  welfare  of  the  country 
—have  arisen.  The  elimination  of  these  evils  is  the  chief 
object  of  the  elaborate  system  of  government  regulation 
which  has  been  built  up  in  this  country,  and  a  discussion 
of  regulation  must  concern  itself  primarily  with  the  prob- 
lem of  rates.  It  is  true  that  questions  of  service  and  of 
finance  must  not  be  neglected.  The  interrelationship  be- 
tween rates,  service,  and  finance  has  been  succinctly  stated 
as  follows: 

The  transportation  problem  has  three  vitally  important  factors : 
(1)  rates,  (2)  service,  and  (3)  financial  return.  Neither  can  be 
intelligently  or  equitably  considered  except  with  reference  to  the 
other  two.  The  railway  has  a  right  to  exact,  and  the  public 
to  require,  fair  and  reasonable  rates ;  but  what  are  such  rates 
depends  largely  on  the  service  given  for  them  and  on  the  financial 
return  /received  by  the  owners  of  the  railway.  The  public  has 
a  right  to  demand  safe,  convenient,  and  adequate  service;  but 
how  safe,  convenient,  and  adequate  a  railway  can  make  its  service 

64 


Theory  and  Practice  of  Rate-Making  65 

depends  largely  on  its  financial  return,  and  this  on  what  rates 
it  can  charge.  The  owners  of  the  railways  are  legally  entitled 
to  a  "fair  return,"  but  this  right  is  not  absolute;  it  is  condi- 
tioned on  what  kind  of  service  is  given  and  at  what  rates.1 

But  while  it  is  obviously  necessary,  in  an  adequate  dis- 
cussion of  the  rate  problem,  to  keep  in  mind  the  inter- 
dependence of  rates,  service,  and  return,  the  success  or 
failure  with  which  a  railway  performs  its  public  functions 
appears  most  clearly  and  most  directly  in  the  adjustment 
of  its  rates,  and  it  is  through  a  discussion  of  rates  that 
the  heart  of  the  railroad  problem  may  be  most  success- 
fully reached. 

THEORIES  OF  RATE-MAKING 

COST  OF  SERVICE  AND  VALUE  OF  SERVICE 

There  are  two  prevailing  theories  as  to  the  principles 
upon  which  railway  rates  shall  be  based.  One  is  that 
rates  should  equal  the  cost  of  the  service,  including  a 
reasonable  profit  to  the  railway  company ;  the  other 
theory  is  that  rates  should  be  determined  in  accordance 
with  the  value  of  the  service  to  the  passenger  or  shipper. 
The  general  contrast  between  these  two  theories  is  thus 
described  by  Professor  Ripley : 

These  two  principles  of  cost  of  service  and  value  of  service  are 
directly  opposed  in  one  regard;  for  the  cost-of-service  theory 
harks  directly  back  to  railway  expenditure,  while  the  value-of- 
service  principle  contemplates  primarily  the  effect  upon  the  rail- 
way 's  income  account.  According  to  the  latter  view,  any  charge 
is  justified  which  is  not  detrimental  to  the  shipper,  as  indicated 
by  a  positive  reduction  in  the  volume  of  business  offered.  No 
charge,  on  the  other  hand,  may  be  deemed  reasonable  according 

1  S.  O.  Dunn,  The  American  Transportation  Question,  v. 


66  Railway  Regulation 

to  the  cost-of-service  principle,  which  affords  more  than  a  fair 
profit  upon  the  business,  regardless  of  its  effect  upon  the  shipper.2 

COST  OF  SERVICE  :  DESIRABILITY 

At  first  sight  the  cost  theory,  usually  advocated  by  the 
public  and  sometimes  by  the  shippers,  seems  eminently 
entitled  to  approval  and  acceptance,  inasmuch  as  it  com- 
plies with  the  requirements  of  reasonableness  which  we 
commonly  recognize  in  ordinary  business.  In  discussing, 
for  example,  the  price  of  a  manufactured  article,  most 
people  agree  that  if  it  is  possible  to  find  a  fair  price  at 
all,  that  fair  price  is  one  which  equals  the  cost  of  produc- 
tion, including  in  cost  of  production  a  reasonable  profit 
to  the  entrepreneur  3  as  well  as  reimbursement  for  actual 
expenditure.  This  reasoning  is  not  applicable  to  the 
adjustment  of  railway  rates  in  our  present  industrial 
system.  Striking  evidence  is  presented  of  the  peculiar 
economic  character  of  the  railway  business  and  of  the 
very  special  and  vital  relation  which  it  bears  to  the  public 
welfare,  when  we  observe  the  result  of  applying  the  cost- 
of-service  principle  to  railway  rates. 

It  happens  that  many  of  the  most  necessary  articles 
of  commerce  and  of  personal  consumption — such,  for 
example,  as  wheat,  corn  and  other  food  products,  lumber, 
iron  ore,  coal,  oil,  furniture  and  similar  commodities — are 
heavier  and  bulkier  in  proportion  to  their  value  than 
many  of  the  higher-priced  luxuries  now  consumed — such, 
for  example,  as  jewelry,  lace,  wines,  and  the  like.  Since 

2  W.  Z.  Ripley,  'Railroads:  Bates  and  Regulation,  167. 

s  There  is  no  single  English  word  which  will  render  adequately  the  mean- 
ing of  this  French  term.  It  comes  from  the  verb  "  entreprendre, ' '  which 
means  to  "undertake,"  "engage  in  an  enterprise."  Some  writers  use 
' '  enterpriser ' '  for  the  French  word.  '  *  Dealer ' y  and  ' '  tradesman ' '  some- 
times render  it  well  enough.  In  the  present  instance  "manufacturer"  or 
"producer"  expresses  its  meaning  most  accurately. 


Theory  and  Practice  of  Rate-Making  67 

weight  and  bulk  increase  the  cost  of  carriage,  the  first 
named  necessaries  would,  on  the  cost  principle,  be  com- 
pelled to  bear  very  high  rates,  while  luxuries  and  com- 
modities providing  the  mere  comforts  of  individuals 
would  be  transported  at  low  rates.  If  necessaries  were 
to  be  shipped,  therefore,  the  high  cost  of  transportation 
would  enhance  their  prices  so  decidedly  as  to  discourage 
consumption  and  react  upon  production.  Obviously  a 
system  of  rate-making  the  general  effect  of  which  would 
be  to  discourage  the  production  and  use  of  the  necessaries 
of  life,  and  at  the  same  time  to  stimulate  the  production 
of  luxuries,  would  be  inimical  to  the  public  welfare. 

Moreover,  what  is  of  even  greater  importance,  such 
a  rate  adjustment  would  minimize  the  extent  of  large- 
scale  production  and  deprive  the  public,  to  a  large  de- 
gree, of  the  advantages  of  the  territorial  division  of  labor. 
The  practicability  of  large-scale  production  is  dependent 
fundamentally  upon  an  extensive  market,  and  the  terri- 
torial division  of  labor  depends  very  largely  upon  the 
possibility  of  procuring  raw  materials  and  food  products 
at  low  rates  of  transportation.  A  rate  adjustment  on  the 
principle  of  cost  of  service  would  narrow  the  market  and 
raise  notably  the  prices  of  raw  materials  and  food  prod- 
ucts.4 The  Interstate  Commerce  Commission,  in  its  first 
annual  report,  in  rejecting  the  cost-of-service  theory  as 
the  sole  basis  of  rate-making,  emphasizes  the  fact  that  it 
"  would  restrict  within  very  narrow  limits  the  commerce 
in  articles  whose  bulk  or  weight  was  large  as  compared 

* ' '  The  phenomenal  industrial  advance  of  the  last  twenty-five  years  has 
been  made  possible  by  the  low  transportation  rates  on  food  products  and 
the  materials  of  industry;  and  these  low  charges  would  not  have  been 
possible,  had  not  the  articles  of  higher  value  per  bulk  paid  more  than  their 
proportionate  share  of  the  total  expenses  of  railroad  transportation." — 
E.  E.  Johnson,  American  Eailway  Transportation  (2d  ed.),  274. 


68  Railway  Regulation 

with  their  value/'  5  It  is  to  be  noted,  however,  that  the 
Commission  has  shown  a  marked  tendency  in  recent  years 
to  give  great  weight  to  the  cost-of-service  principle  as  one 
of  the  factors  in  the  adjustment  of  the  railway  rate 
structure.6 

COST  OF  SEEVICE:  PBACTICABILITY 

But  the  cost-of-service  principle,  even  if  desirable, 
could  not  be  relied  upon  as  a  sole  basis  for  the  adjust- 
ment of  railway  rates,  because,  as  we  have  seen  in  an 
earlier  chapter,  it  cannot  be  applied  in  practice.  So  large 
a  proportion  of  railway  expenditures  are  constant  that 
most  railway  services  arfv-raiiclered^jLLjmJit  cost.  It  is 
entirely  impracticable,  ttiprefoTB,  to  Ascertain  the  exact 

A  railroad  cannot  charge 


its  shippers  or  passengers  a  sum  equal  to  the  cost  of  the 
service  each  receives,  because  it  is  impossible  to  deter- 
mine what  the  cost  of  a  given  haul  will  be  or  has  been, 
and  it  is  equally  impossible  to  estimate  with  mathematical 
accuracy  the  expense  involved  in  carrying  a  passenger 
between  any  two  points.  The  cost  theory,  then,  however 
useful  it  may  be  as  one  element  in  determining  the  rea- 
sonableness of  rates,  cannot  by  itself  be  employed  as  a 
general  and  comprehensive  principle  of  rate  adjustment. 
In  one  of  the  earliest  cases  coming  before  it  for  adjudi- 
cation, the  Interstate  Commerce  Commission  recognized 
the  impracticability  of  using  cost  of  service  as  a  sole 
basis  of  railway  rates. 

While  cost,  as  has  been  said,  is  an  element  to  be  taken  into 
account  in  the  fixing  of  rates  and  one  of  the  very  highest  impor- 
tance, it  cannot,  for  reasons  well  understood,  be  made  the  rate 

6  First  Annual  Report  of  the  Interstate  Commerce  Commission,  30-32. 
6  This  gradual  change  of  policy  is  discussed  in  C.  B.  Hillyer,  Grounds  of 
Proof  in  Eate  Cases,  10. 


Theory  and  Practice  of  Rate-Making  69 

basis,  but  it  must  in  any  case  be  used  with  caution  and  reserve. 
This  is  not  merely  because  the  word  "cost"  is  made  use  of  in 
different  senses  when  applied  to  railroad  traffic,  it  being  often 
used  to  cover  merely  the  expense  of  loading,  moving,  and  unload- 
ing trains,  but  also  because  in  whatever  sense  the  word  be  used, 
it  is  quite  impossible  to  apportion  with  accuracy  the  cost  of 
service  among  the  items  of  the  traffic.  Any  attempt  to  appor- 
tion the  cost  would  at  the  best  and  under  the  most  favorable  cir- 
cumstances only  reach  an  approximation.7 

VALUE  OF  SERVICE:  SIGNIFICANCE 

The  principle  that  rates  should  be  determined  in  ac- 
cordance with  the  value  of  the  service  to  the  passenger 
or  shipper  is  generally  advocated  by  the  railways  and  is 
usually  followed  in  practice.  The  phrase,  "  value  of 
service/'  is  often  taken  to  be  equivalent  to  *  *  charging 
what  the  traffic  will  bear/'  but  its  meaning  or  signifi- 
cance is  not  always  clear  or  definite. 

By  " value  of  the  service"  is  not  meant,  for  example, 
that  the  railroad  should  charge  each  passenger  or  shipper 
according  to  the  subjective  value  of  the  particular  service 

i  In  re  petition  of  Louisville  &  Nashville  Eailroad  Company,  1  I.  C.  C. 
Eep.  31;  II.  C.  R.  238.  It  is  to  be  noted,  however,  that  the  Commission 
has  nevertheless  used  cost  of  service  "as  a  means  of  determining  the  rea- 
sonableness of  rates  in  four  different  classes  of  cases:  (1)  when  a  rate 
higher  than  the  ordinary  could  be  justified  on  the  ground  that  some  special 
service  had  been  performed  or  a  special  obligation  incurred  by  the  carrier; 

(2)  where  a  rate  complained  of  was  judged  as  to  its  reasonableness  by  com- 
paring the  ascertainable  costs  of  transportation  with  those  incurred  in  trans- 
porting  other   commodities   whose   rates   were   believed  to   be   reasonable; 

(3)  where  comparison  was  made  with  costs  on  other  roads  or  on  other  parts 
of  the  system;   (4)  where  the  costs  of  shipping  commodities  in  car-load  lots 
were  compared  with  those  incurred  in  shipping  less  than  car-load  quantities. 
By  methods  of  comparison,  therefore,  rather  than  by  attempting  to  ascer- 
tain the  exact  and  total  costs  of  transporting  a  given  commodity,  the  Inter- 
state Commerce  Commission  has  made  use  of  the  cost-of -service  principle  as 
applied  to  railway  rates. ' ' — M.  B.  Hammond,  Railway  Eate  Theories  of  the 
Interstate  Commerce  Commission,  44  et  seq. 


70  Railway  Regulation 

to  him,  that  is,  the  value  which  in  his  own  mind  he  attrib- 
utes to  the  given  service.  If  this  meaning  were  attached 
to  the  value-of- service  principle,  it  would  be  even  more 
impracticable  and  less  desirable  as  a  basis  for  rate- 
making  than  the  cost-of -service  theory;  for,  in  the  first 
place,  it  would  be  absolutely  impossible  to  determine  this 
subjective  value  in  each  individual  case,  and,  furthermore, 
if  subjective  values  could  be  measured,  the  grossest  per- 
sonal distinctions  and  discriminations  would  result.  The 
care-free  excursionist  to  whom  a  trip  from  Chicago  to 
New  York  is  worth  only  ten  dollars  would  be  charged  that 
sum,  while  the  merchant  or  broker  to  whom  such  a  jour- 
ney is  essential  to  some  important  business  transaction 
might  justly  be  charged  a  hundred  times  that  amount  on 
the  basis  of  the  subjective  value  of  the  service  to  him. 
Such  an  interpretation  of  the  meaning  of  value  of  service 
would  neither  explain  the  existing  system  of  rate  adjust- 
ment nor  suggest  an  improvement  thereon. 

The  usual  meaning  of  the  value-of-service  principle 
is  that  it  measures  the  added  value  given  to  commodities 
as  a  result  of  their  being  transported  from  one  place  to 
another.  Differences  in  the  price  of  the  same  commodity 
in  different  markets  indicates  the  extent  of  the  added 
value  resulting  from  the  transportation  of  that  com- 
modity. The  value  of  carrying  an  article,  for  example, 
from  Grand  Rapids  to  Omaha,  the  price  of  the  article 
being  $15  in  Grand  Eapids  and  $16  in  Omaha,  would 
be$l. 

This  method  of  measurement  cannot  be  applied  thus 
definitely  to  the  passenger  traffic.  The  value  of  the 
service  to  the  passenger  must  be  ascertained  through 
experiment.  A  rate  which  tends  to  decrease  the  normal 
traffic  is  probably  above  the  value  of  the  service;  a  rate 
which  tends  to  increase  the  normal  traffic  is  probably 
below  the  value  of  the  service  to  the  marginal  passenger. 


Theory  and  Practice  of  Rate-Making  71 

In  practice,  it  is  through  some  such  experimentation, 
often  unconscious,  that  the  value  of  the  service  in  freight 
traffic  as  well  as  in  passenger  traffic  is  determined.  The 
adjustment  of  rates,  then,  on  the  basis  of  value  of  service, 
or  by  charging  what  the  traffic  will  bear,  comes  to  mean 
the  establishment  of  such  rates  as  will  not  discourage  or 
reduce  the  shipment  of  freight  and  will  not  discourage  or 
decrease  the  demand  for  passenger  service. 

Value  of  the  service,  as  distinct  from  cost  of  service, 
has  in  the  past  been  accepted  by  the  Interstate  Commerce 
Commission  as  a  fundamental  principle  of  rate-making. 
In  its  first  annual  report  the  Commission  declared  that 
"such  method  of  apportionment  would  be  best  for  the 
country,  because  it  would  enlarge  commerce  and  extend 
communication;  it  would  be  best  for  the  railroads,  be- 
cause it  would  build  up  a  large  business ;  and  it  would  not 
be  unjust  to  property  owners,  who  would  thus  be  made 
to  pay  in  some  proportion  to  benefits  received. " 8  As 
already  suggested,  however,  the  Commission  now  gives 
greater  emphasis  to  cost  of  service  than  formerly. 

In  this  same  report,  the  Commission  recognizes,  what  is 
generally  accepted  by  the  railways  as  a  working  rule, 
that  the  relative  value  of  commodities  constitutes  the 
chief  factor  in  the  determination  of  the  value  of  the  serv- 
ice to  the  shipper,  *  '  that  the  value  of  the  article  carried  is 
the  most  important  element  in  determining  what  shall 
be  paid  upon  it."  8  The  general  result  of  this  method  of 
rate  adjustment  is  that  the  charges  on  commodities  which 
are  cheap  in  proportion  to  weight  or  bulk  are  low,  while 
the  rates  on  the  lighter  but  more  expensive  goods  are 
high.9  In  like  manner  the  rates  on  competitive  traffic  are 

s  First  Annual  Report  of  the  Interstate  Commerce  Commission,  30-32. 
»  A  ton  of  coal  is  worth  at  the  mine,  perhaps,  $1.50.     A  ton  of  shoes  is 
worth  at  the  factory,  perhaps,  $1,500.     Coal  moves  in  car-loads  of  40  tons 


72  Railway  Regulation 

uniformly  lower  than  the  rates  at  non-competing  points. 
This  disregard  of  distance,  too,  is  but  an  application  of 
the  value-of-service  principle  to  the  adjustment  of  rail- 
way rates. 

It  is  to  be  noted,  moreover,  that  this  principle  is 
adopted  on  the  basis  of  purely  economic  considerations. 
Charging  what  the  traffic  will  bear  does  not  mean  that 
railway  charges  for  different  categories  of  traffic  are  fixed 
on  the  principle  of  equality  of  sacrifice  by  the  payer,  in 
order  that  equitable  concessions  may  be  made  to  the 
weaker  members  of  the  community;  or  that  the  problem 
of  rate  adjustment  is  at  bottom  one  of  ethics,  involving 
those  considerations  of  public  policy  and  of  right  and 
wrong  which  recur  in  the  discussions  of  proportional  or 
progressive  taxation.10 

The  classification  of  freight  and  the  adjustment  of  the 
railway  tariff  on  the  basis  of  what  the  traffic  will  bear 
are  due  fundamentally  to  the  fact  that  railway  service  is 
rendered  so  largely  at  joint  cost.  The  result  of  the  ad- 
justment may  possess  an  ethical  significance;  the  motive 
for  the  adjustment  is  purely  economic.  It  is  because 
from  one-half  to  three-fourths  of  all  the  expenditures  of 
a  railway  are  joint  and  constant  that  railway  charges 
must  be  so  adjusted  as  not  to  discourage  the  shipment  of 
freight  or  decrease  the  demand  for  passenger  service. 

or  more;  therefore,  a  car-load  is  worth  about  $60.  Shoes  move  in  car-loads 
of  perhaps  10  tons;  therefore,  a  car-load  is  worth  about  $15,000.  There 
would  not  be  much  difference  between  the  direct  costs  of  hauling  the  car- 
load of  coal  and  the  car-load  of  shoes.  But  does  it  not  appeal  to  equity 
and  common  sense  that  the  car-load  of  coal,  which  is  worth  $60,  should  be 
given  a  lower  rate  per  ton  per  mile,  or  even  per  car  per  mile,  than  the  car- 
load of  shoes,  which  is  worth  $15,000? — S.  O.  Dunn,  The  American  Trans- 
portation Question,  25. 

1°  The  most  able  discussion  of  this  problem  is  to  be  found  in  F.  W. 
Taussig,  "A  Contribution  to  the  Theory  of  Railway  Bates,"  Quarterly 
Journal  of  Economics,  Vol.  5,  pp.  438-65. 


Theory  and  Practice  of  Rate-Making  73 

VALUE  OF  SERVICE:  ADEQUACY 

The  value-of-service  principle,  as  a  sole  basis  of  rail- 
way rates,  is  as  inadequate  for  the  protection  of  the 
public  interest  as  the  cost-of-service  principle,  by  itself, 
is  undesirable  from  the  standpoint  of  public  welfare.  The 
relation  of  rates,  as  between  different  classes  of  traffic 
and  as  between  competitive  and  non-competitive  points, 
may  well  be  determined,  and  in  practice  largely  is  deter- 
mined, by  charging  what  the  traffic  will  bear;  but  the 
propriety  of  the  general  level  of  rates,  the  reasonable- 
ness of  rates  in  and  of  themselves,  cannot  be  assured  by 
the  mere  adoption  of  the  value-of-service  principle.  Un- 
reasonably high  rates  do  not  automatically  and  immedi- 
ately discourage  the  shipment  of  goods  or  the  use  of  the 
railway  service,  for  the  burden  of  excessive  rates  does  not 
rest  upon  the  shipper,  being  immediately  shifted  in  most 
cases  to  the  consumer.  Moreover,  the  consumer,  on  his 
part,  is  not  always  and  at  once  influenced  by  excessive 
rates,  because  his  demand  is  inelastic  in  the  case  of  neces- 
saries— he  must  have  them  even  at  excessive  cost — and  in 
the  case  of  the  higher-priced  goods  the  cost  of  transporta- 
tion, even  when  rates  are  unduly  high,  does  not  consti- 
tute a  very  substantial  part  of  the  total  price  of  the 
product. 

In  support  of  the  inadequacy  of  the  value-of-service 
idea  as  a  check  upon  unreasonably  high  rates,  Professor 
Eipley  presents  much  striking  evidence  taken  from  the 
claims  of  the  railways  themselves.  Because  this  evidence 
is  so  convincing,  it  is  quoted  somewhat  at  length.  Pro- 
fessor Eipley  writes : 

That  the  principle  of  charging  what  the  traffic  will  bear  affords 
no  protection  to  the  consumer  against  exorbitant  rates  on  many 
commodities,  follows  also  from  the  relative  insignificance  of 


74  Railway  Regulation 

transportation  charges  as  compared  with  the  value  of  the  goods. 
This,  in  fact,  was  naively  conceded  by  railway  managers  them- 
selves, when,  as  in  the  case  of  the  wide-spread  freight  rate  ad- 
vances of  1908-1909,  publicity  agents  flooded  the  country  with 
calculations  as  to  the  infinitesimal  fraction  which  would  be  added 
to  the  price  of  commodities  by  a  ten  per  cent  rise  in  rates.  The 
rate  from  Grand  Rapids  to  Chicago  on  an  ordinary  dining-room 
set  of  furniture  being  $1.60,  a  ten  per  cent  increase  would  add 
only  sixteen  cents  to  the  cost.  A  harvester  transported  one  hun- 
dred miles  would  be  enhanced  seventeen  and  a  half  cents  in 
price;  a  kitchen  stove  carried  from  Detroit  to  the  Mississippi 
would  only  cost  twenty-five  cents  more;  and  the  price  of  a 
Michigan  refrigerator  sold  in  New  York  would  be  only  seven 
and  one-half  cents  higher,  were  freight  rates  to  be  increased  by 
ten  per  cent  in  each  instance.  On  wearing-apparel  the  propor- 
tions were  represented  as  even  more  striking.  An  ordinary  suit 
of  clothes  transported  three  hundred  miles  under  similarly  en- 
hanced rates  would,  it  was  alleged,  cost  only  one-third  of  a  cent 
more.  For  all  his  apparel  made  in  New  England,  consisting  of 
everything  from  hats  to  shoes,  a  ten  per  cent  rise  of  rates  would 
affect  each  wearer  in  the  Middle  West  by  less  than  one  cent. 
True  enough  all  this,  and  a  striking  testimonial  to  the  effective- 
ness of  the  railway  service  of  the  country ;  but  at  the  same  time, 
if  a  ten  per  cent  increase  of  rates  is  inappreciable  to  the  con- 
sumer, why  not  increase  them  by  twenty  per  cent?  And  what 
becomes  of  the  argument  that  charging  rates  according  to  what 
the  traffic  will  bear  is  an  ample  safeguard  against  extortion? 
Many  of  these  small  changes  in  price  are  diffused  in  the  fric- 
tion of  retail  trade;  some  of  them  are  unfortunately  magnified 
to  the  consumer,  especially  under  conditions  of  monopoly. 
When  freight  rates  on  beef  go  up  ten  cents  per  hundred- 
weight, the  consumers'  price  is  more  likely  than  not  to  rise  by 
ten  times  that  amount.  But  even  assuming  the  final  cost  to 
follow  the  range  of  transportation  charges  closely,  is  it  not  evi- 
dent that  many  freight  charges  are  so  small  relatively  by  com- 
parison with  other  costs  of  production,  that  consumption  is  not 
proportionately  affected  by  their  movement  one  way  or  the  other  ? 


Theory  and  Practice  of  Rate-Making  75 

And  yet  the  entire  argument  that  the  value-of -service  principle 
is  a  self-governing  engine  against  unreasonable  rates  is  based 
upon  the  opposite  assumption.  Surely  the  increased  income  to 
the  carriers  when  rates  are  raised  must  come  from  some  one! 
Because  it  is  not  felt  is  no  reason  for  denying  its  existence  as  a 
tax.  But  the  very  fact  that  it  is  not  felt  undermines  the  argu- 
ment that  a  safeguard  against  extortion  obtains.  The  theory 
that  value  of  service  in  itself  affords  a  reliable  basis  for  rate- 
making,  presupposes  that  freight  rates  and  prices  move  in  unison 
— a  supposition  which  a  moment's  consideration  shows  to  be  un- 
tenable in  fact.11 

SOCIAL  CONSIDERATIONS 

Both  cost  of  service  and  value  of  service  must  therefore 
be  considered  in  the  adjustment  of  railway  rates.  It  is 
generally  recognized  that  cost  of  service,  in  the  sense  of 
the  extra  or  "out-of-pocket"  cost  in  case  of  a  specific 
service  and  in  the  sense  of  the  total  cost  in  case  of  the 
traffic  as  a  whole,  fixes  the  lower  limit  of  rates;  while 
value  of  service  fixes  the  upper  limit  beyond  which  the 
specific  rate  or  the  general  level  of  rates  cannot  go.  The 
reasonable,  or  intermediate,  rate  must  be  determined, 
and  under  our  system  of  government  regulation  generally 
tends  to  be  determined,  by  the  application  of  social  con- 
siderations or  by  the  demands  of  public  welfare.  These 
considerations  of  public  interest  are  numerous  and  to  a 
large  extent  undefined.  A  comprehensive  and  logical 
social  theory  of  rates  can  hardly  be  evolved  until  there 
is  a  clearer  understanding  and  a  greater  agreement  in 
the  community  as  to  its  ends  and  purposes.  But  in  gen- 
eral terms  many  of  these  social  considerations  may  be 
defined. 

A  system  of  rates  fixed  with  reference  to  public  wel- 
fare should  be  so  adjusted  as  to  stimulate  industrial 

11  W.  Z.  Eipley,  Eailroads:  Bates  and  Regulation,  171-73. 


76  Railway  Regulation 

enterprise,  to  develop  as  well  as  conserve  natural  re- 
sources, to  provoke  and  maintain  fair  and  healthy  com- 
petition in  the  world  of  business,  and  to  facilitate  the 
movement  of  labor.  It  should  encourage  the  settlement 
of  new  land,  discourage  undue  congestion  of  population 
in  the  large  cities,  enlarge  the  opportunities  of  rural  life, 
promote  political  unity,  stimulate  intercourse  between 
different  parts  of  the  country,  and  help  attain  such  other 
ends  as  the  community's  interest  may  demand. 

The  specific  adjudications  of  the  Interstate  Commerce 
Commission  are  not  infrequently  based  upon  considera- 
tions of  public  welfare,  sometimes  expressly  mentioned, 
more  often  tacitly  implied.  In  accepting  the  value  of  the 
commodity  as  a  basis  of  the  reasonableness  of  the  rates 
applicable  to  different  categories  of  traffic,  the  Commis- 
sion often  adduces  social  considerations  in  support  of  its 
position.  In  justifying  the  establishment  of  low  rates  on 
iron  and  steel  products  the  Commission  said: 

While  some  of  the  relatively  low  rates  on  low  class  commodities, 
including  iron  and  steel,  are  lower  because  of  competition  by 
water  than  they  would  otherwise  be,  the  general  comparatively 
low  rating  applied  to  them  is  largely  due  to  the  character  of 
such  commodities,  the  use  to  which  they  are  put,  the  demand  for 
them  in  large  quantities  throughout  the  country,  their  suscepti- 
bility of  movement  at  less  cost  and  risk  to  the  carrier  than  high 
class  and  more  valuable  freight,  and  other  like  conditions. 
It  is  to  the  interest  of  the  carriers  as  well  as  the  public  that 
their  rates  be  low  enough,  if  not  below  a  remunerative  point, 
to  permit  the  general  movement  and  distribution  of  these  com- 
modities in  general  demand  in  larger  quantities  for  construction, 
building,  manufacturing,  and  other  purposes.  Reasonable  free- 
dom of  such  movement  and  distribution  stimulates  the  growth 
and  development  of  the  country  and  thereby  promotes  all  in- 
terests.12 

12  Colorado  Fuel  &  Iron  Company  v.  The  Southern  Pacific  Company  et  al, 
6  I.  C.  C.  E«p.  264. 


Theory  and  Practice  of  Rate-Making  77 

RATE-MAKING  PRACTICE  13 

The  principles  under  discussion  in  the  preceding  pages 
are  applied  in  practice,  to  a  greater  or  smaller  extent, 
in  the  classification  of  freight  and  in  the  adjustment  of 
tariffs. 

THE  CLASSIFICATION  OF  FREIGHT 

Every  well-developed  system  of  rate-making  is  based 
upon  the  classification  of  freight.  The  articles  of  com- 
merce usually  or  occasionally  offered  for  transportation 
are  so  numerous  that  it  would  be  practically  impossible 
to  assign  a  separate  rate  to  each;  on  the  other  hand,  as 
we  have  seen,  it  would  be  clearly  unwise  to  charge  the 
same  rates  for  all  commodities.  The  desirability  of 
avoiding  undue  complexity  in  the  rate  structure,  and  at 
the  same  time  of  distinguishing  between  various  kinds  of 
goods,  creates  the  necessity  of  grouping  commodities 
into  classes  and  fixing  rates  for  each  class. 

At  the  present  time  there  are  three  principal  classifi- 
cations in  the  United  States:  the  Official,  the  Southern, 
and  the  Western.  Eoughly  speaking,  the  Official  Classi- 
fication governs  the  territory  north  of  the  Ohio  and 
Potomac  rivers  and  east  of  the  Mississippi ;  the  Southern 
Classification  applies  to  the  region  east  of  the  Mississippi 
and  south  of  Official  Classification  Territory ;  the  Western 
Classification  is  in  use  throughout  the  remainder  of  the 
country.14  Each  of  these  classifications  is  in  charge  of 
a  committee  consisting  of  the  traffic  officers  of  the  lead- 
is  This  subject  is  treated  here  very  briefly  and  in  most  general  terms. 
It  is  considered  in  exhaustive  detail  in  the  more  technical  treatises  on  classi- 
fications and  rates  which  constitute  part  of  the  course  in  Interstate 
Commerce  and  Eailway  Traffic. 

**  These  boundaries  are  very  general  in  their  nature.  Each  of  the 
classifications  often  governs  traffic  into  territories  ordinarily  governed  by 
other  classifications. 


78  Railway  Regulation 

ing  roads  affected  by  the  classification.  In  addition  to 
these  three  leading  classifications,  ten  of  the  states  main- 
tain by  law  special  classifications  for  intra-state  traffic. 

The  number  of  separate  items  covered  by  each  classi- 
fication is  very  large,  the  Official  Classification,  in  which 
the  greatest  number  appears,  containing  about  ten  thou- 
sand different  descriptions  of  traffic.  The  Official  Classi- 
fication describes  six  regular  classes,  designated  by  the 
numbers  one  to  six,  inclusive,  and  three  classes  made  by 
prescribed  formulas ;  the  Southern  Classification  has  thir- 
teen classes,  designated  by  the  numbers  one  to  six  and  by 
the  letters  A  to  H  (Gr  being  omitted) ;  the  Western  Classi- 
fication embraces  ten  groups,  designated  by  the  numbers 
one  to  five  and  by  the  letters  A  to  E.  Moreover,  many 
articles  are  rated  in  exceptional  ways :  such,  for  example, 
as  one  and  one-half  times  first  class,  double  first  class, 
four  times  first  class,  fifteen  per  cent  below  second  class, 
twenty  per  cent  below  third  class,  and  so  forth.  Further- 
more, many  commodities  of  special  importance  within  the 
territory  served  by  each  railroad  are  entirely  withdrawn 
from  classification  and  are  carried  at  special  rates.  In 
addition,  therefore,  to  the  class  tariffs  each  road  has  com- 
modity rates  for  such  goods  as  live  stock,  dressed  meats, 
grain  and  grain  products,  lumber,  iron,  coal,  oil,  and  the 
like. 

The  value  of  a  commodity,  as  compared  with  its  bulk 
and  weight,  constitutes,  as  we  have  seen,  the  fundamental 
basis  for  classification;  but  numerous  other  factors,  the 
most  important  of  which  is  the  cost  of  service,  exert  an 
important  influence  in  the  grouping  of  commodities. 
Some  of  these  considerations  were  stated  by  the  Inter- 
state Commerce  Commission  in  1897  as  follows : 


Theory  and  Practice  of  Rate-Making  79 

Whether  commodities  were  crude,  rough,  or  finished;  liquid 
or  dry;  knocked  down  or  set  up;  loose  or  in  bulk;  nested  or  in 
boxes,  or  otherwise  packed ;  if  vegetables,  whether  green  or  dry, 
desiccated  or  evaporated ;  the  market  value  and  shippers '  repre- 
sentations as  to  their  character;  the  cost  of  service,  length  and 
direction  of  haul ;  the  season  and  manner  of  shipment ;  the  space 
occupied  and  weight;  whether  in  carload  or  less-than-carload 
lots;  the  volume  of  annual  shipments  to  be  calculated  on;  the 
sort  of  car  required,  whether  flat,  gondola,  box,  tank,  or  special ; 
whether  ice  or  heat  must  be  furnished ;  the  speed  of  trains  neces- 
sary for  perishable  or  otherwise  "rush"  goods;  the  risk  of 
handling,  either  to  the  goods  themselves  or  other  property;  the 
weights,  actual  and  estimated;  the  carrier's  risk  or  owner's  re- 
lease from  damage  or  loss.15 

In  an  important  case  16  involving  the  relative  rates 
upon  live  hogs  and  dressed  beef  and  hog  products,  the 
Commission  laid  primary  stress  upon  the  relative  costs 
of  rendering  the  service,  as  is  evidenced  by  its  conclu- 
sions, stated  as  follows: 

(1)  The  product  is  carried  in  more  expensive  cars.  *  *  * 
The  interest  on  the  increased  original  cost  and  the  greater  outlay 
for  repairs  are  constant  expenses.  (2)  The  weight  of  the  re- 
frigerator car,  when  loaded  with  the  product,  including  the  ice 
for  refrigeration,  is  about  64,000  pounds,  and  that  of  the  live 
stock  car  when  loaded  is  46,000  pounds.  If  the  tariff  were  based 
solely  upon  tonnage,  that  is,  upon  the  weight  of  the  car  and  its 
load  when  the  carrier  charges  30  cents  per  hundred  for  carrying 
the  live  hogs,  the  charge  for  carrying  the  product  should  be 
about  42  cents  per  hundred.  (3)  The  loading  and  unloading 
of  the  animals  by  the  shipper  instead  of  the  carrier  is  a 
continuing  advantage.  (4)  The  rapidity  with  which  the  cars 
used  in  the  live-stock  traffic  are  loaded  render  them  less  liable 

IB  Eleventh  Annual  Eeport  of  the  Interstate  Commerce  Commission,  67. 
is  John  P.  Squire  &  Co.  v.  The  Michigan  Central  Kailroad  Co.  et  al., 
4  I.  C.  C.  Rep.  611;  3  I.  C.  B.  515. 


80  Railway  Regulation 

to  detention,  and  they  are  returned  to  the  traffic  sooner  than 
when  loaded  with  the  product.  (5)  The  refrigerator  cars  have 
to  be  iced.  Five  tons  of  ice  and  salt  per  car  are  furnished  in  the 
Chicago-Boston  business.  This  is  a  constant  expense  in  summer 
months.  (6)  The  product  is  more  valuable  than  the  live  animals. 

While  the  last  of  these  conclusions  deals  with  the  value- 
of-service  principle,  the  Commission  makes  it  clear  that 
it  relies  upon  cost  as  the  fundamental  factor  in  a  case 
of  this  sort ;  for,  in  this  same  decision,  it  declares : 

We  are  of  the  opinion  that,  in  the  fixing  of  relative  rates 
upon  articles  strictly  competitive,  'as  these  are,  the  proper 
relation  should  be  determined  from  the  cost  of  the  service,  and 
if  the  difference  in  this  respect  between  two  competitive  articles 
can  be  ascertained,  such  a  rate  should  be  fixed  for  each  as  cor- 
responds to  the  cost  of  service.  This  is  fair  to  the  carrier,  and 
we  believe  that  the  manufacturer  has  a  right  to  demand  of  the 
companies  that  such  a  relation  of  rates  as  .to  these  articles  should 
be  maintained. 

THE  MAKING  OF  BATES 

The  railway  tariff  is  distinct  from  the  freight  classi- 
fication. It  is  issued  independently  by  each  of  the  rail- 
ways or  by  tariff-issuing  agencies  such  as  the  Central 
Freight  Association.  It  represents  a  graduation  of  rates 
based  on  the  distance  each  commodity  is  carried,  not  on 
the  nature  of  the  commodity.  Moreover,  whereas  the 
primary  criterion  for  the  classification  of  freight  is  the 
value  of  the  service,  measured  usually  by  the  relative 
values  of  the  commodities  carried,  the  initial  considera- 
tion in  the  adjustment  of  the  freight  tariff  is  the  cost  of 
the  service  as  measured  by  distance.17  A  strict  distance 
tariff,  however,  would  not  absolutely  reflect  the  cost  of 

17  As  will  be  seen  later,  in  actual  practice,  distance  is  often  a  very  small 
factor. 


Theory  and  Practice  of  Rate-Making  81 

service  principle;  in  other  words,  on  the  basis  of  cost, 
rates  should  not  be  exactly  proportional  to  distance.  The 
cost  of  each  shipment  consists  of  two  elements,  the  ter- 
minal expenses  at  points  of  origin  and  destination  such  as 
for  loading  and  unloading,  which  are  the  same  for  both 
long  and  short  hauls,  and  the  transportation  expenses 
for  actual  carriage,  which  alone  vary  with  distance.  A 
fifty-mile  haul,  therefore,  costs  more  per  mile  than  a  haul 
of  a  hundred  miles  because  the  terminal  expense  is  the 
same  in  both  cases. 

The  establishment  of  lower  rates  for  goods  shipped 
in  carload  lots  than  for  the  same  goods  shipped  in  less 
than  carload  lots  is  likewise  a  departure  from  distance 
as  the  sole  measure  of  cost.  Minimum  carload  weights 
are  fixed,  varying  for  different  classes  of  commodities, 
and  for  the  shipment  of  goods  in  such  carload  lots  lower 
rates  per  hundred-weight  are  quoted  than  those  charged 
for  less  than  carload  consignments.  The  justification  for 
these  differences  is  to  be  found  largely  in  differences  in 
cost.  To  use  the  language  of  Professor  Ripley,  "not  only 
the  amount  of  paying  freight  in  relation  to  dead  weight, 
but  the  cost  of  loading  and  unloading,  of  billing  or  col- 
lection and  of  adjusting  damages — all  of  these  elements 
of  cost  are  noticeably  less  in  the  case  of  a  full  carload. "  18 

But  even  in  the  adjustment  of  carload  and  less-than- 
carload  rates,  many  considerations  beside  cost  of  service 
exert  an  important  influence  upon  the  result.  The  nature 
of  existing  competition  between  producing  and  distribut- 
ing centers,  as  well  as  between  producers  and  jobbers,  is 
largely  affected  by,  and  in  its  turn  largely  determines, 
the  character  and  extent  of  carload  and  less-than-carload 
ratings.  In  like  manner  the  entire  rate  structure  is 
dependent,  in  its  actual  adjustment,  upon  competition  of 

is  W.  Z.  Eipley,  Eailroads:  Eates  and  'Regulation,  326. 


82  Railway  Regulation 

routes  and  competition  of  markets.  In  order  to  meet 
the  competition  of  circuitous  or  roundabout  routes  (not 
to  mention  competition  by  water  carriers),  and  in  order 
to  enable  producers  in  different  parts  of  the  country  and 
in  different  sections  of  the  world  to  compete  on  equal 
terms  in  common  markets,  the  railways  must  necessarily 
disregard,  to  a  large  extent,  the  primary  element  of  dis- 
tance. 

In  practice,  then,  the  railway  tariff,  as  well  as  the 
freight  classification,  tends  to  correspond  to  the  value  of 
the  service  or  to  what  the  traffic  will  bear.  There  are  no 
invariable  rules,  formulas,  or  principles  by  which  rates 
are  made.  The  pressure  of  competitive  forces  and  of 
established  business  interests  exerts  the  most  powerful 
influence  upon  the  development  of  the  rate  structure. 
Subject  to  this  pressure,  the  financial  welfare  of  the  rail- 
way corporations  tends  to  be  the  controlling  considera- 
tion in  rate-making,  in  the  absence  of  public  control.  Un- 
der such  circumstances,  rates  are  likely  to  be  as  high  as 
they  can  be  made  without  discouraging  traffic,  where  no 
competition  exists,  while  at  competing  points  they  are 
likely  to  be  reduced  as  far  as  is  necessary  in  order  to 
secure  traffic. 

Without  public  control,  or  with  inadequate  public  con- 
trol, it  is  inevitable  that  the  adjustment  of  rates  by  pri- 
vate corporations  should  produce  many  evils  and  abuses 
from  the  standpoint  of  public  welfare,  and  the  history 
of  American  railway  transportation  discloses  such  evils 
and  abuses  in  full  measure.  Unreasonably  high  rates 
have  often  been  charged,  many  unjust  discriminations 
have  been  made,  distressing  uncertainties  as  to  rates 
have  existed,  and  demoralizing  rate  wars  have  been  con- 
ducted. It  is  not  remarkable,  therefore,  that  an  extensive 
system  of  public  regulation  has  been  developed. 


Theory  and  Practice  of  Rate-Making  83 

THE  REASONABLENESS  OF  RATES 

There  can  be  scarcely  any  doubt  that  railway  rates  in 
certain  places,  at  certain  times,  or  on  certain  commodi- 
ties have  frequently  been  excessive,  but  it  is  very  diffi- 
cult to  pass  judgment  on  the  reasonableness  of  the 
general  level  of  rates.  The  comparative  method  is  often 
used  in  an  attempt  to  show  that  American  railway  rates 
are  moderate.  Comparisons  are  made  between  rates  in 
this  country  and  those  abroad,  and  also  between  rates 
now  charged  and  those  formerly  in  effect. 

As  between  foreign  countries  and  the  United  States, 
all  thorough  comparisons  lead  to  the  conclusion  that 
American  passenger  rates  are  in  general  higher  than 
those  abroad,  while  freight  rates  are  substantially  lower. 
The  results  of  such  comparisons,  however,  are  not  con- 
clusive proof  of  the  reasonableness  or  unreasonableness 
of  the  general  level  of  rates. 

Differences  in  rates  between  different  countries  often 
result  from  differences  in  industrial  conditions.  The 
preponderance  of  low-class,  long-distance  freight,  for 
example,  which  prevails  in  the  United  States  because  of 
our  vast  territory  and  the  abundance  of  our  natural  re- 
sources, inevitably  results  in  low  average  receipts  per 
ton-mile  on  American  railways,  and  goes  far  toward  ex- 
plaining the  contrast  between  the  United  States  and 
European  countries  in  receipts  per  ton-mile. 

Differences  in  rates  between  different  countries  may 
also  be  explained,  to  some  extent,  by  differences  in  the 
service  rendered.  This  is  particularly  true  in  the  case 
of  passenger  rates.  Though  American  passenger  rates 
are  much  higher  than  those  in  Europe,  more  comfortable 
and  luxurious  accommodations  and  faster  transportation 
are  provided  in  the  United  States  than  are  common 


84  Railway  Regulation 

abroad,  while  American  railways  also  carry  more  bag- 
gage free  than  the  European  railways. 

Comparisons  between  current  rates  and  those  charged 
at  various  times  in  the  past  are  likewise  inconclusive. 
That  there  has  been  a  substantial  decline  in  transporta- 
tion charges  during  the  past  twenty-five  years  is  clearly 
established.  According  to  official  statistics  of  the  Inter- 
state Commerce  Commission  the  average  receipts  of 
American  railways  per  passenger  mile  were  2.349  cents 
in  1888  and  1.938  cents  in  1910,  while  the  receipts  per  ton- 
mile  fell  from  1.001  cents  to  .753  cent  during  the  same 
period. 

The  significance  of  these  figures,  however,  may  be  easily 
overestimated.  A  decrease  in  receipts  per  unit  of  traffic 
may  occur  without  any  change  in  rates.  Such  a  result 
would  necessarily  follow  if  low-class  traffic  were  to  in- 
crease in  amount  more  rapidly  than  high-class  traffic.  For 
example,  if  a  road  developed  a  large  coal  business,  the 
return  per  ton-mile  would  probably  show  a  material  de- 
crease if  it  had  previously  been  carrying  high-grade 
traffic.  Under  such  circumstances  the  average  receipts 
per  unit  on  the  entire  traffic  would  be  lowered,  even  if  the 
general  level  of  rates  remained  stationary;  and  in  point 
of  fact  there  has  been  a  decidedly  more  than  proportion- 
ate increase  in  the  low-class  freight  carried  by  American 
railways.  In  like  manner,  when  shipments  in  carload 
lots  become  more  common,  in  comparison  with  smaller 
consignments,  lower  receipts  per  ton-mile  are  the  natural 
result ;  for  carload  lots  are  carried  at  lower  rates  per  ton 
than  smaller  shipments,  and  hence  an  increase  in  the  pro- 
portion of  carload  to  less-than-carload  lots  necessarily 
reduces  the  average  receipts  per  ton-mile. 

Moreover,  the  general  development  of  the  country,  in- 
creasing the  density  of  the  traffic,  has  naturally  produced 


Theory  and  Practice  of  Rate-Makmg  85 

a  reduction  in  cost  of  carriage  per  unit.  Between  1888 
and  1910  the  mileage  of  American  railways  increased 
about  sixty  per  cent,  while,  roughly  speaking,  the  pas- 
senger traffic  more  than  doubled  and  the  freight  traffic 
more  than  trebled.  To  offset  these  tendencies  toward  a 
natural  reduction  of  railway  rates,  other  forces  have  been 
at  work  in  the  direction  of  their  maintenance  or  increase. 
The  most  important  of  these  forces  are  the  greater 
effectiveness  with  which  railway  managers  have  been  able 
to  curb  competition,  and  the  undoubted  increase  in  the 
cost  of  railway  operation  arising  from  the  general  de- 
crease in  the  purchasing  power  of  money,  which  is  one 
of  the  factors  in  the  increased  cost  of  labor  and  materials. 
The  need,  then,  for  public  regulation  of  railway  rates 
does  not  arise  from  any  conclusive  evidence  as  to  the 
extortionate  character  of  the  general  level  of  American 
rates ;  it  arises,  rather,  from  the  very  nature  of  the  rail- 
way business  and  from  the  extreme  complexity  of  the 
railway  rate  structure. 

TEST  QUESTIONS 

1.  What  are  the  two  most  important  principles  upon  which 
freight  rates  are  based? 

2.  Discuss  briefly  the  cost-of-service  theory  from  the  stand- 
point of  desirability  and  from  the  standpoint  of  practicability. 

3.  Discuss    briefly    the    value-of-service    principle    in    rate- 
making. 

4.  How  is  a  system  of  rates  which  is  fixed  with  direct  reference 
to  public  welfare  adjusted  ? 

5.  What  are  some  of  the  considerations  which  affect  the  classi- 
fication of  freight  as  specified  by  the  Interstate  Commerce  Com- 
mission ? 

6.  What  is  the  difference  between  a  freight  classification  and 
a  freight  tariff? 

7.  What  are  the  chief  factors  considered  in  the  classification  of 
a  commodity? 


86  Railway  Regulation 

8.  Why  is  a  comparison  of  rates  applying  in  different  coun- 
tries of  little  value  in  determining  reasonableness? 

9.  What  are  some  of  the  reasons  why  a  comparison  of  current 
rates  with  past  rates  applying  in  this  country  is  very  unsatis- 
factory ? 

10.     What  factors  have  been  instrumental  in  working  for 
higher  rates  in  this  country  ? 


CHAPTER  VI 
THE  REGULATION  OF  RAILWAY  RATES 

THE  RATE-FIXING  POWER  OF  THE  STATES 
THE  BIGHT  OF  REGULATION 

Aside  from  the  judicial  enforcement  of  the  common- 
law  duties  of  public  service  corporations,1  railway-rate 
regulation  has  been  applied  in  the  first  instance  through 
the  state  legislatures  and  commissions  and  through  the 
Interstate  Commerce  Commission.  The  primary  prob- 
lem was  whether  power  was  legally  vested  in  the  state 
legislatures  to  control  the  rates  and  charges  of  railway 
corporations.  The  question  first  arose  in  the  so-called 
Granger  cases,2  involving  the  validity  of  the  Granger 
legislation  explained  in  an  earlier  chapter.  The  validity 
of  this  legislation  was  upheld  at  every  point. 

The  first  and  most  important  of  these  Granger  cases 
was  Munn  v.  Illinois,  decided  in  1876.  In  this  case  the 
constitutionality  of  an  Illinois  statute  fixing  a  maximum 
rate  for  the  storage  of  grain  in  elevators  in  Chicago  was 
involved.  The  plaintiff,  who  had  been  convicted  and  fined 

1  The  common-law  duties  of  common  carriers  in  many  of  their  phases  are 
treated  in  The  Law  of  Carriers  by  Ealph  Merriam,  a  treatise  in  the  course 
in  Interstate  Commerce  and  Eailway  Traffic. 

2  Munn  v.  Illinois,  94  U.  S.  113;  C.,  B.  &  Q.  E.  B,  Co.  v.  Iowa,  94  U.  S. 
155;  Peik  v.  C.  and  N.  W.  Ey.  Co.,  Lawrence  v.  Same,  94  U.  S.  164;  C..  M.  & 
St.  C.  E.  E.  Co.  v.  Ackley,  94  U.  S.  179;  Winona  &  S*.  Peter  E.  E.  Co.  v. 
Blake,  94  U.  S.  180;  Stone  v.  Wisconsin,  94  U.  S.  181. 

87 


88  Railway  Regulation 

in  the  state  courts  for  a  violation  of  the  statute,  appealed 
to  the  federal  courts  on  the  ground  that  the  enforcement  of 
the  statutory  rate  would  constitute  a  violation  of  the 
Fourteenth  Amendment  to  the  Federal  Constitution.3 
The  constitutionality  of  the  statute  was  upheld  by  the 
Supreme  Court,  and  the  same  legal  principles  were  ap- 
plied in  the  subsequent  cases  to  railway  rates. 

The  fundamental  argument  of  the  railways  was  the 
sweeping  claim  that  it  was  not  within  the  scope  of  legis- 
lative power  to  regulate  railway  rates.  In  support  of 
this  claim  attention  was  called  to  the  general  principles 
which  govern  the  attitude  of  our  law  towards  industry: 
that  what  a  man  charges  for  his  goods  or  services  is 
looked  upon  as  a  private  matter  to  be  determined  by  con- 
tract between  himself  and  those  with  whom  he  deals ;  and 
that  the  state  undertakes  to  respect  such  contracts  and 
the  right  to  make  them,  and  does  not  attempt  to  coerce 
people  in  their  bargains  with  each  other. 

The  Supreme  Court  admitted  that  these  principles  pre- 
vail in  ordinary  private  industry  but  insisted  upon  the 
rule  of  law  existing  from  time  immemorial  that  the  state 
is  vested  with  ample  power  to  regulate  the  charges  of 
public  callings  or  of  any  business  affected  with  a  public 
interest.  Under  this  principle  of  law  cartmen,  ferrymen, 
hackney  coachmen,  wharfingers,  millers,  and  others  had 
in  times  past  been  held  subject  to  public  control.  In  the 
course  of  industrial  development  new  types  of  business 
affected  with  a  public  interest  have  emerged,  among  them 
the  grain  elevators  and  railways  involved  in  these  Gran- 

3  That  part  of  the  Fourteenth  Amendment  which  is  involved  here  and  in 
subsequent  parts  of  this  chapter  reads  as  follows :  ' '  No  state  shall  make  or 
enforce  any  law  which  shall  abridge  the  privileges  or  immunities  of  citizens 
of  the  United  States;  nor  shall  any  state  deprive  any  person  of  life,  liberty, 
or  property  without  due  process  of  law;  nor  deny  to  any  person  within  its 
jurisdiction  the  equal  protection  of  the  laws." 


The  Regulation  of  Railway  Rates  89 

ger  cases.    To  regulate  their  rates,  therefore,  was  merely 
to  apply  old  principles  to  new  conditions. 

STATUTORY  REGULATION  AND  CHARTER  AUTHORITY 

The  railways  opposed  legislative  regulation  by  the 
states  on  the  further  ground  that  such  regulation  was  a 
violation  of  their  charter  contracts,  since  the  charters 
invariably  granted  to  railway  companies  the  power  to  fix 
their  rates  and  fares,  and  was,  therefore,  repugnant  to 
the  constitutional  provision  that  no  state  shall  pass  any 
law  impairing  the  obligation  of  contract.  On  this  issue, 
too,  the  Supreme  Court  upheld  the  validity  of  the  state 
legislation.  It  held  that  the  grant  to  a  railway  company 
of  the  power  to  fix  its  rates  did  not  involve  a  renunciation 
by  the  state  of  its  own  superior  right  of  regulation.  It  is 
a  well-settled  rule  of  law  that  all  grants  by  the  state,  and 
especially  grants  of  immunity,  are  to  be  strictly  construed 
against  the  party  to  whom  such  grants  are  made,  and  no 
grant  of  immunity  can  be  claimed,  therefore,  unless  it  is 
specifically  and  definitely  conferred.  In  the  case  of  Bug- 
gies v.  Illinois,4  the  court  held  that : 

A  railroad  company  whose  board  of  directors  was  by  the 
charter  authorized  to  establish  rates  could  not  as  against  a  gen- 
eral law  of  the  state  exact  more  than  three  cents  per  mile  per 
passenger.  .  .  .  The  power  granted  was  to  determine  the 
rates  by  by-laws ;  the  power  to  pass  by-laws  was  limited  to  such 
as  were  not  repugnant  to  the  laws  of  the  state,  and  hence  it  was 
held  that  the  by-laws  could  not  fix  a  greater  rate  than  was  per- 
mitted by  the  general  legislation;  "Grants  of  immunity  from 
legitimate  control,"  said  the  Chief  Justice,  "are  never  to  be 
presumed. ' ' 5 

4  108  U.  S.  526. 

»  Francis  J.  Swayze,  ' '  The  Regulation  of  Railway  Rates  under  the  Four- 
teenth Amendment, "  Quarterly  Journal  of  Economics,  1912,  389-424. 


90  Railway  Regulation 

ADMINISTEATIVE   REGULATION 

In  the  Railroad  Commission  Cases  °  the  Supreme  Court 
held  that  this  reserved  power  of  regulation,  in  spite  of 
prior  charter  authority  to  the  railways  to  establish  tolls 
and  charges,  could  be  exercised  by  the  state  through  ad- 
ministrative commissions  subsequently  established.  Chief 
Justice  Waite  said : 

The  right  to  fix  reasonable  charges  has  been  granted,  but  the 
power  of  declaring  what  shall  be  deemed  reasonable  has  not  been 
surrendered.  If  there  had  been  an  intention  of  surrendering 
this  power,  it  would  have  been  easy  to  say  so ;  not  having  said  so, 
the  conclusive  presumption  is  there  was  no  such  intention. 

The  doctrine  was  early  established,  then,  that  railway 
rates  are  subject  to  governmental  control  through  direct 
legislative  enactment  and  through  indirect  administra- 
tive supervision. 

THE  DEVELOPMENT  OF  FEDERAL  RATE  REGULATION 
THE  AUTHORITY  OF  THE  INTERSTATE  COMMERCE  COMMISSION 

When  the  Act  to  Regulate  Commerce  was  passed  in 
1887,  there  was  no  question  as  to  the  power  of  Congress  to 
regulate  railroads,  and  no  serious  doubt  as  to  the  consti- 
tutionality of  the  law.  The  real  problem  at  issue,  which 
was  not  definitely  determined  by  judicial  decision  till  a 
decade  after  the  original  Act  was  passed,  was  the  extent 
of  authority  conferred  upon  the  Interstate  Commerce 
Commission  by  the  Act  to  Regulate  Commerce. 

At  this  point  it  is  necessary  to  consider  only  the  rate- 
making  power  of  the  Commission.  It  is  to  be  noted,  at 

6  116  U.  S.  307. 


The  Regulation  of  Railway  Rates  91 

the  outset,  that  the  Commission  never  asserted  any  right 
to  prescribe  railway  rates  in  the  first  instance.  In  one  of 
the  earliest  cases  the  Commission  declared  that  "its 
powers  in  respect  to  rates  is  to  determine  whether  those 
which  the  roads  impose  are,  for  any  reason,  in  conflict 
with  the  statutes. ' ' 7  And  again,  in  a  later  case,  the  Com- 
mission said: 

This  Commission  is  not  primarily  a  rate-making  body.  The 
carrier  is  left  free  to  arrange  his  own  tariffs  in  the  first  instance. 
We  sit  for  the  correction  of  what  is  unreasonable  and  unjust  in 
those  tariffs.8 

From  the  very  beginning,  however,  the  Commission  did 
assume  the  power,  upon  investigation,  to  declare  the  rates 
established  by  the  carriers  to  be  unreasonable  and  to  pre- 
scribe reasonable  rates  in  lieu  thereof  to  be  followed  in 
the  future.  The  Commission  exercised  this  power  on  the 
basis  of  express  provisions  of  the  Act,  which,  in  the  first 
place,  declared  that  all  rates  must  be  just  and  reasonable, 
and  that  every  unjust  and  unreasonable  rate  was  pro- 
hibited and  unlawful,  and,  in  the  second  place,  authorized 
and  required  the  Commission  to  execute  and  enforce  the 
provisions  of  the  statute.  On  this  basis  the  Commission 
proceeded  for  a  period  of  ten  years,  without  serious  ques- 
tioning even  from  the  railroads,  to  prescribe  maximum 
reasonable  rates. 

JUDICIAL    NULLIFICATION    OF    THE    COMMISSION'S    AUTHORITY 

In  1897,  however,  in  the  Cincinnati  Freight  Bureau 
Case,  which  has  come  to  be  known  as  the  Maximum 
Freight  Bate  Decision,  the  -Supreme  Court  of  the  United 

7  Thatcher  v.  Delaware  and  Hudson  Canal  Company,  1  I.  C.  C.  Rep.  152. 

8  Cincinnati  Freight  Bureau  v.  C.,  N.  O.  &  T    P.  Ry.  Co.,  7  I.  C.  C. 
Eep.  191. 


92  Railway  Regulation 

States  definitely  decided  that  the  Commission  had  no 
power  to  prescribe  rates  for  the  future,  its  authority  to 
pass  upon  the  reasonableness  or  the  unreasonableness  of 
rates  being  limited  entirely  to  determining  whether  the 
rates  fixed  by  the  carriers  in  the  past  were  reasonable  or 
unreasonable.  This  decision  effectively  destroyed  the 
rate-making  power  of  the  Interstate  Commerce  Commis- 
sion. The  reasoning  on  the  basis  of  which  the  Supreme 
Court  reached  its  conclusion  may  best  be  expressed  in  its 
own  words.  Mr.  Justice  Brewer  thus  summarized  the 
position  of  the  Court : 

We  have  therefore  these  considerations  presented:  First. 
The  power  to  prescribe  a  tariff  of  rates  for  carriage  by  a  common 
carrier  is  a  legislative,  and  not  an  administrative  or  judicial 
function,  and,  having  respect  to  the  large  amount  of  property 
invested  in  railroads,  the  various  companies  engaged  therein,  the 
thousands  of  miles  of  road,  and  the  millions  of  tons  of  freight 
carried,  the  varying  and  diverse  conditions  attaching  to  such 
carriage,  is  a  power  of  supreme  delicacy  and  importance.  Sec- 
ond. That  Congress  has  transferred  such  a  power  to  any  admin- 
istrative body  is  not  to  be  presumed  or  implied  from  any  doubtful 
and  uncertain  language.  The  words  and  phrases  efficacious  to 
make  such  a  delegation  of  power  are  well  understood,  and  have 
been  frequently  used,  and,  if  Congress  had  intended  to  grant 
such  a  power  to  the  Interstate  Commerce  Commission,  it  cannot 
be  doubted  that  it  would  have  used  language  open  to  no  miscon- 
struction, but  clear  and  direct.  Third.  Incorporating  into  a 
statute  the  common-law  obligation  resting  upon  the  carrier  to 
make  all  its  charges  reasonable  and  just,  and  directing  the  Com- 
mission to  execute  and  enforce  the  provisions  of  the  act,  does 
not  by  implication  carry  to  the  Commission,  or  invest  it  with  the 
power  to  exercise,  the  legislative  function  of  prescribing  rates 
which  shall  control  in  the  future.  Fourth.  Beyond  the  infer- 
ence which  irresistibly  follows  from  the  omission  to  grant  in 
express  terms  to  the  Commission  this  power  of  fixing  rates  is 


The  Regulation  of  Railway  Rates  93 

the  clear  language  of  section  6,  recognizing  the  right  of  the 
carrier  to  establish  rates,  to  increase  or  reduce  them,  and  pre- 
scribing the  conditions  upon  which  such  increase  or  reduction 
may  be  made,  and  requiring,  as  the  only  conditions  of  its  action — 
first,  publication;  and,  second,  the  filing  of  the  tariff  with  the 
Commission.  The  grant  to  the  Commission  of  the  power  to  pre- 
scribe the  form  of  the  schedules,  and  to  direct  the  place  and 
manner  of  publication  of  joint  rates,  thus  specifying  the  scope 
and  limit  of  its  functions  in  this  respect,  strengthens  the  conclu- 
sion that  the  power  to  prescribe  rates  or  fix  any  tariff  for  the 
future  is  not  among  the  powers  granted  to  the  Commission. 
These  considerations  convince  us  that  under  the  Interstate  Com- 
merce Act  the  Commission  has  no  power  to  prescribe  the  tariff 
of  rates  which  shall  control  in  the  future,  and  therefore  cannot 
invoke  a  judgment  in  mandamus  from  the  courts  to  enforce 
any  such  tariff  by  it  prescribed.  .  .  .  Our  conclusion,  then, 
is  that  Congress  has  not  conferred  upon  the  Commission  the 
legislative  power  of  prescribing  rates,  either  maximum  or  mini- 
mum or  absolute.  As  it  did  not  give  the  express  power  to  the 
Commission,  it  did  not  intend  to  secure  the  same  result  indi- 
rectly by  empowering  that  tribunal  to  determine  what  in  refer- 
ence to  the  past  was  reasonable  and  just,  whether  as  maximum, 
minimum,  or  absolute,  and  then  enable  it  to  obtain  from  the 
courts  a  peremptory  order  that  in  the  future  the  railroad  com- 
panies should  follow  the  rates  thus  determined  to  have  been  in 
the  past  reasonable  and  just.9 

THE  RE-ESTABLISHMENT  OF  THE  BATE-MAKING  POWEB 

The  nullification  of  the  Commission's  rate-making 
power  resulting  from  this  decision  virtually  undermined 
the  whole  system  of  administrative  control  which  had  been 
sought  to  be  established  through  the  Act  to  Regulate  Com- 
merce. With  the  Commission  stripped  of  its  power  to 
prescribe  rates  for  the  future,  there  was  no  effective  rem- 

9  Interstate  Commerce  Commission  v.  C.,  N.  CX  &  T.  P.  Ey.v  Co.,  167 
D.  S.  479. 


94  Railway  Regulation 

edy  against  unreasonable  rates  for  the  shipper,  and  no 
adequate  protection  for  the  general  public.  In  the  words 
of  Professor  Dixon : 

The  Supreme  Court's  decision  that  the  Commission  could  not 
prescribe  a  rate  for  the  future  left  to  the  shipper  merely  the 
privilege  of  suing  for  excessive  charges  when  a  rate  had  been 
held  by  the  Commission  to  be  unreasonable.  This  the  individual 
shipper  usually  failed  to  do,  the  amount  in  controversy  in  any 
individual  case  being  usually  too  small  to  warrant  it.  More- 
over, the  one  who  paid  the  freight  rate  was  frequently  a  middle- 
man, and  the  individual  who  actually  suffered  from  the  excessive 
rate,  the  consumer  or  the  producer,  had  no  standing  in  court 
and  could  not  recover.  The  only  adequate  relief  from  such  a 
situation  was  to  clothe  the  Commission  with  power  to  prevent 
such  occurrences  in  the  future.10 

This  situation  was  an  important  factor  in  the  enactment 
of  the  Hepburn  amendments  of  1906.  As  a  result  of  the 
Hepburn  Act,  the  Commission  is  now  definitely  clothed 
with  power,  not  only  to  declare  existing  rates  unjust  or 
unreasonable,  but  to  prescribe  reasonable  rates  to  be  fol- 
lowed in  the  future.  The  initiative  in  rate-making  still 
rests  with  the  railways,  but  ample  power  for  effective  con- 
trol is  vested  in  the  Commission. 

In  the  course  of  the  legislative  discussion  of  the  Hep- 
burn Act,  earnest  doubt  was  expressed  as  to  the  consti- 
tutionality of  such  a  delegation  by  Congress  of  legislative 
authority  to  an  administrative  commission  as  was  in- 
volved in  the  rate  section  of  the  Act.  In  the  Maximum 
Freight  Bate  Decision  the  Supreme  Court  had  denied 
that  the  original  Act  to  Regulate  Commerce  had  con- 
ferred such  authority  upon  the  Commission;  it  did  not 
deny  that  Congress  possessed  the  right  to  delegate  this 

10  Frank   H.   Dixon,    "The   Interstate   Commerce   Act   as   Amended   in 
1906, ' '  Quarterly  Journal  of  Economics,  1906,  22-51.  . 


The  Regulation  of  Railway  Rates  95 

/ 

rate-making  power.     On  the  contrary,  the  court  made 
the  assertion  that: 

Congress  might  itself  prescribe  the  rates,  or  it  might  commit 
to  some  subordinate  tribunal  this  duty,  or  it  might  leave  with 
the  companies  the,  right  to  fix  rates,  subject  to  regulation  and 
restrictions,  as  well  as  to  that  rule  which  is  as  old  as  the  exist- 
ence of  common  carriers,  to  wit,  that  rates  must  be  reasonable. 

Moreover,  it  is  a  general  rule  of  law  that,  although 
legislative  power  cannot  be  delegated,  the  law-making 
body  may  fix  a  standard  to  which  rates  shall  conform  and 
entrust  to  an  administrative  body  the  duty  of  adjusting 
rates  in  conformity  with  that  standard.  On  the  basis  of 
this  principle  the  constitutionality  of  the  Hepburn  Act  has 
been  judicially  upheld,  and  the  authority  of  the  federal 
government  to  regulate  railway  rates  through  the  Inter- 
state Commerce  Commission  is  now  established  beyond 

question. 

i 

THE  DOCTBINE  OF  JUDICIAL  EEVIEW 

Both  the  states  and  the  national  government,  then,  may 
regulate  railway  rates  either  through  direct  legislative 
enactment  or  through  the  instrumentality  of  administra- 
tive commissions.  But  in  a  series  of  very  important  de- 
cisions under  the  Fourteenth  Amendment,  the  United 
States  Supreme  Court  finally  decided  that  neither  legis- 
latures nor  commissions  have  the  power  to  establish  con- 
clusive rates  for  common  carriers.  Final  determination 
of  the  reasonableness  or  the  unreasonableness  of  railway 
rates  is  vested  in  the  courts  and  not  in  the  legislatures. 
The  establishment  of  the  doctrine  of  judicial  review  may 
best  be  traced  through  the  words  and  decisions  of  the 
courts. 


96  Railway  Regulation 

ITS  DENIAL 

The  problem  first  arose  in  the  Granger  cases.  The 
railways  not  only  denied  the  right  of  the  legislatures 
to  regulate  railway  rates,  in  which  claim,  as  we  have  seen, 
they  were  squarely  overruled  by  the  Supreme  Court,  but 
they  also  protested  that  the  rates  prescribed  were  so  low 
as  to  deprive  them  of  an  adequate  return  on  the  capital 
invested.  They  appealed  to  the  courts  for  protection  on 
the  ground  that,  even  if  the  legislatures  possessed  the 
right  to  fix  rates,  the  courts  should  exercise  their  superior 
right  to  determine  whether  the  rates  so  established  were 
reasonable,  in  order  that  the  railway  companies  might  not 
be  deprived  of  their  property  without  due  process  of  law. 
The  first  answer  of  the  Court  was  in  opposition  to  the 
railways  and  in  support  of  the  legislative  authority  to 
determine  conclusively  the  rates  to  be  charged  by  railway 
companies.  In  Munn  v.  Illinois  Chief  Justice  Waite  said 
for  the  Court : 

It  is  insisted,  however,  that  the  owner  of  property  is  entitled 
to  a  reasonable  compensation  for  its  use,  even  though  it  be  clothed 
with  a  public  interest,  and  that  what  is  reasonable  is  a  judicial 
and  not  a  legislative  question.  As  has  already  been  shown,  the 
practice  has  been  otherwise.  In  countries  where  the  common  law 
prevails,  it  has  been  customary  from  time  immemorial  for  the 
legislature  to  declare  what  shall  be  reasonable  compensation 
under  such  circumstances,  or,  perhaps  more  properly  speaking, 
to  fix  a  maximum  beyond  which  any  charge  made  would  be 
unreasonable.  .  .  .  The  controlling  fact  is  a  power  to  regu- 
late at  all.  If  that  exists,  the  right  to  establish  the  maximum 
of  charge,  as  one  of  the  means  of  regulation,  is  implied.1 1 

This  position  as  to  the  supremacy  of  the  legislature  in 

11  94  U.  S.  113. 


The  Regulation  of  Railway  Rates  97 

rate-making  was  definitely  confirmed  in  another  of  these 
early  cases  in  the  following  words : 

Where  property  has  been  clothed  with  a  public  interest,  the 
legislature  may  fix  a  limit  to  that  which  shall  in  law  be  reason- 
able for  its  use.  This  limit  binds  the  courts  as  well  as  the 
people.  If  it  has  been  improperly  fixed,  the  legislature,  not  the 
courts,  must  be  appealed  to  for  the  change.12 

ITS   EMERGENCE 

These  two  cases,  as  well  as  a  number  of  others  belong- 
ing to  this  Granger  group  which  involved  the  validity  of 
railway  rates  fixed  by  the  legislatures  of  middle  western 
states,  were  decided  in  1876.  By  1885  doubt  began  to  be 
cast  upon  the  conclusive  rate-making  power  of  the  states, 
and  the  seeds  of  the  doctrine  of  judicial  review  began  to 
appear.  In  the  so-called  Railroad  Commission  Cases  al- 
ready referred  to,  involving  an  effort  by  the  railways  to 
prevent  the  enforcement  of  rates  under  a  Mississippi 
statute,  the  Court  upheld  the  validity  of  the  statute  and 
affirmed  the  right  of  the  state  to  fix  rates,  but  limitations 
upon  the  rate-making  power  of  the  states  were  suggested. 
Chief  Justice  Waite  declared : 

From  what  has  been  said,  it  is  not  to  be  inferred  that  this 
power  of  limitation  or  regulation  is  itself  without  limit.  This 
power  to  regulate  is  not  a  power  to  destroy,  and  limitation  is 
not  the  equivalent  of  confiscation.  Under  pretense  of  regulating 
fares  and  freights,  the  state  cannot  require  a  railroad  corporation 
to  carry  persons  or  property  without  reward;  neither  can  it  do 
that  which  in  law  amounts  to  a  taking  of  private  property  for 
public  use  without  just  compensation,  or  without  due  process 
of  law.13 

12  Peik  v.  C.  &  N.  W.  By.  Co.,  94  U.  S.  164. 

13  Stone  v.  Farmers'  Loan  &  Trust  Co.,  116  U,  S.  307. 


98  Railway  Regulation 

ITS  ESTABLISHMENT 

Finally,  in  the  Minnesota  Rate  Cases,14  the  original 
position  of  the  Court  was  entirely  reversed.  In  Chicago, 
Milwaukee  &  St.  Paul  Railroad  Co.  v.  Minnesota  the  doc- 
trine was  definitely  established  that  the  reasonableness  of 
railway  rates  fixed  by  the  states  is  subject  to  review  by 
the  courts.  In  this  case,  under  a  Minnesota  statute  au- 
thorizing a  commission  to  prescribe  railway  rates,  the 
Commission  reduced  the  rates  for  the  transportation  of 
milk  between  certain  points  from  three  cents  to  two  and 
a  half  cents  per  gallon,  and  the  charges  for  switching  cars 
from  $1.25  and  $1.50  to  $1.00  per  car.  Under  the  statute 
the  rates  fixed  by  the  Commission  were  declared  to  be 
conclusive.  Appeal  was  brought  to  the  federal  courts  on 
the  ground  that  the  denial  of  a  judicial  determination  of 
the  reasonableness  of  these  rates  was  a  confiscation  of 
property  without  due  process  of  law.  The  Supreme  Court 
upheld  the  claim  of  the  railroad,  declaring  invalid  the 
Minnesota  statute  in  which  the  rates  established  by  the 
Commission  were  held  to  be  conclusive.  The  Court  said : 

The  question  of  the  reasonableness  of  a  rate  of  charge  for 
transportation  by  a  railroad  company,  involving,  as  it  does,  the 
element  of  reasonableness,  both  as  regards  the  company  and  as 
regards  the  public,  is  eminently  a  question  for  judicial  investi- 
gation, requiring  due  process  of  law  for  its  determination.  If 
the  company  is  deprived  of  the  power  of  charging  reasonable 
rates  for  the  use  of  its  property,  and  such  deprivation  takes 
place  in  the  absence  of  an  investigation  by  judicial  machinery, 
it  is  deprived  of  the  lawful  use  of  its  property,  and  thus,  in 
substance  and  effect,  of  the  property  itself,  without  due  process 
of  law,  and  in  violation  of  the  Constitution  of  the  United  States ; 
and  in  so  far  as  it  is  thus  deprived,  while  other  persons  are  per- 

14  C.,  M.  &  St.  P.  Railway  Co.  v.  Minnesota,  134  U.  S.  418;  M.  E.  Ry.  Co. 
v.  Minnesota,  134  U.  S.  467. 


The  Regulation  of  Railway  Rates  99 

mitted  to  receive  reasonable  profits  upon  their  invested  capital, 
the  company  is  deprived  of  the  equal  protection  of  the  laws. 

THE  BASIS  OF  THE  DOCTRINE 

This  decision,  then,  clearly  established  the  right  of 
judicial  review.  It  apparently  shifted  the  entire  burden 
of  rate  regulation  from  the  legislatures  to  the  courts,  sub- 
stituting, in  this  vital  matter  of  public  policy,  judicial  for 
legislative  opinion.  In  so  far  as  this  case  appeared  to 
assert  the  right  of  the  court  to  enforce  its  judgment  in 
rate-making  in  place  of  the  judgment  of  legislatures  or 
commissions,  it  has  been  modified  by  subsequent  decisions. 
The  doctrine  of  judicial  review,  as  at  present  applied, 
merely  involves  a  determination  by  the  court  whether  the 
rates  fixed  by  legislatures  or  commissions  are  so  unrea- 
sonable as  to  amount  to  confiscation  of  property  rather 
than  to  mere  regulation  of  public  callings.  So  interpreted, 
the  doctrine  does  not  involve  a  usurpation  of  legislative 
authority  by  the  courts ;  it  is  but  the  enforcement  of  such 
limitations  upon  legislative  authority  as  are  guaranteed 
by  the  fundamental  law  of  the  land. 

The  conflict  is  not  between  the  legislatures  and  the 
courts,  but  rather  between  the  legislatures  and  the  peo- 
ple. In  this,  as  in  all  forms  of  judicial  censorship  of  legis- 
lation, the  courts  are  upholding  the  rights  of  the  people 
by  the  enforcement  of  the  constitutional  guarantees  which 
exist  for  the  protection  of  the  people.  In  specific  cases 
the  courts  sometimes  render  decisions  nullifying  legisla- 
tion which  are  clearly  in  opposition  to  the  best  public  wel- 
fare ;  but  the  mere  right  to  review  legislative  acts  springs 
from  the  nature  of  our  constitutional  system  and  not 
from  usurpation  by  the  courts.  The  real  basis  of  judicial 
censorship  may  be  stated  in  the  words  of  the  Supreme 
Court  of  the  United  States: 


100  Railway  Regulation 

The  idea  that  any  legislature,  state  or  federal,  can  conclu- 
sively determine  for  the  people  and  for  the  courts  that  what  it 
enacts  in  the  form  of  law,  or  what  it  authorizes  its  agents  to 
do,  is  consistent  with  the  fundamental  law,  is  in  opposition  to  the 
theory  of  our  institutions.  The  duty  rests  upon  all  courts,  fed- 
eral and  state,  when  their  jurisdiction  is  properly  invoked,  to 
see  that  no  right  secured  by  the  supreme  law  of  the  land  is 
impaired  or  destroyed  by  legislation.  This  function  and  duty 
of  the  judiciary  distinguishes  the  American  system  from  all  other 
systems  of  government.  The  perpetuity  of  our  institutions  and 
the  liberty  which  is  enjoyed  under  them  depend,  in  no  small 
degree,  upon  the  power  given  the  judiciary  to  declare  null  and 
void  all  legislation  that  is  clearly  repugnant  to  the  supreme  law 
of  the  land.15 

THE  BASIS  OF  RATE  REASONABLENESS 
STANDAKDS  OF  REASONABLENESS  16 

The  right  of  the  courts  to  review  railway  rates  fixed  by 
legislatures  and  commissions  necessitated  the  develop- 
ment by  the  courts  of  standards  of  reasonableness.  On 
what  basis  is  the  reasonableness  of  a  railway  rate  to  be 
tested?  This  is  the  great  question  in  railway  regulation 
which  is  now  agitating  the  minds  of  courts,  commissions, 
and  students  of  railway  economics. 

16  Smyth  v.  Ames,  169  U.  S.  466. 

16  In  the  discussion  which  follows  concerning  the  standards  of  reason- 
ableness developed  by  courts  and  commissions  in  the  regulation  of  railway 
rates,  it  should  be  noted  that  the  construction  of  the  rate  schedule  as  a 
whole  is  usually  under  consideration.  In  the  adjustment  of  individual  rates, 
or  small  groups  of  rates,  such  questions  as  the  investment  value  of  the 
carrier's  property  are  generally  disregarded.  The  term  " reasonable "  as 
it  is  often  used  means  that  rates  are  reasonable  when  compared  with  other 
rates  rather  than  that  the  rates  in  and  of  themselves  are  reasonable.  For 
example,  it  is  quite  common  in  connection  with  cases  before  the  Interstate 
Commerce  Commission  to  refer  to  the  reasonableness  of  a  rate  on  some 
specified  commodity  moving  between  specified  points.  In  such  a  case  it 
will  generally  be  found  that  the  basis  used  is  comparison  with  other  rates 
on  the  same  or  similar  traffic.  In  such  cases  it  would  not  be  possible  to 
consider  such  questions  as  investment. 


The  Regulation  of  Ratiibqy,\J$fltt$ 

The  first  important  answer,  which  still  remains  the 
starting-point  of  all  court  and  commission  decisions  on 
rate  reasonableness,  was  given  in  the  famous  case  of 
Smyth  v.  Ames,  decided  in  1898.  This  case  involved  the 
validity  of  railway  freight  rates  prescribed  under  a 
Nebraska  statute  of  1893.  An  injunction  restraining  the 
enforcement  of  these  rates  was  obtained  in  the  circuit 
court  by  the  railways  and  was  confirmed  by  the  Supreme 
Court.  Justice  Harlan,  in  delivering  the  unanimous  opin- 
ion of  the  Court,  said : 

We  hold,  however,  that  the  basis  of  all  calculation  as  to  the 
reasonableness  of  rates  to  be  charged  by  a  corporation  main- 
taining a  highway  under  legislative  sanction  must  be  the  fair 
value  of  the  property  being  used  by  it  for  the  convenience  of 
the  public.  And  in  order  to  ascertain  that  value,  the  original 
cost  of  construction,  the  amount  expended  in  permanent  improve- 
ments, the  amount  and  market  value  of  its  bonds  and  stock,  the 
present  as  compared  with  the  original  cost  of  construction,  the 
probable  earning  capacity  of  the  property  under  particular  rates 
prescribed  by  statute,  and  the  sum  required  to  meet  operating 
expenses,  are  all  matters  for  consideration,  and  are  to  be  given 

The  prevailing  practice  and  the  grounds  upon  which  this  practice  is 
based  have  been  described  as  follows  by  H.  C.  Lust  in  The  Act  to  Regulate 
Commerce  and  Supplemental  Acts: 

As  a  practical  proposition,  the  proof  concerning  the  unreasonableness 
of  individual  rates  is  often  different  from  that  pertaining  to  an  entire  sys- 
tem of  rates.  The  investment  of  the  carrier,  for  instance,  in  carrying  a 
specified  kind  of  traffic,  such  as  piano  traffic,  cannot  be  ascertained;  so 
in  such  instances  the  most  common  method  of  proof  is  to  compare  the  rate 
attacked  with  rates  on  similar  commodities  transported  under  similar  condi- 
tions, either  by  the  defendant  carrier  or  by  other  railroads.  Of  course,  on 
heavy  commodities,  such  as  coal,  lumber,  and  the  like,  where  such  traffic  con- 
stitutes from  one-third  to  two-thirds  of  the  entire  freight  traffic  of  the 
carrier,  accountants  often  endeavor  to  ascertain  the  investment  of  the  car- 
riers in  such  traffic,  and  the  actual  cost  of  the  service.  If  such  statistics 
are  accurately  ascertained,  they  are  very  important  in  the  determination 
of  what  is  a  reasonable  rate  for  such  traffic. 


102  Railway  Regulation 

such  weight  as  may  be  just  and  right  in  such  case.  We  do  not 
say  that  there  may  not  be  other  matters  to  be  regarded  in  esti- 
mating the  value  of  the  property.  What  the  company  is  entitled 
to  ask  is  a  fair  return  upon  the  value  of  that  which  it  employs 
for  the  public  convenience.  On  the  other  hand,  what  the  public 
is  entitled  to  demand  is  that  no  more  be  exacted  from  it  for  the 
use  of  a  public  highway  than  the  services  rendered  by  it  are 
reasonably  worth.17 

PHYSICAL   VALUATION 

The  important  proposition  laid  down  in  Smyth  v.  Ames 
was  that  the  basis  of  reasonable  rates  must  be  "the  fair 
value  of  the  property  being  used  by  it  for  the  convenience 
of  the  public, "  or  that  "what  the  company  is  entitled  to 
ask  is  a  fair  return  upon  the  value  of  that  which  it  em- 
ploys for  the  public  convenience. "  It  is  true  that  many 
possible  standards  are  mentioned,  but  no  definite  dictum 
is  forthcoming  from  the  Court  as  to  the  relative  merits 
of  these  standards,  or  as  to  what  constitutes  the  control- 
ling considerations  for  a  basis  of  rate  reasonableness. 

The  insistence  of  the  Court  that  railways  are  entitled 
to  a  fair  return  on  a  fair  value  of  their  property  has 
shifted  the  emphasis  in  rate  regulation  to  the  valuation 
of  railway  property.  Such  valuations  have  been  made  by 
a  number  of  the  states,  and  a  comprehensive  appraisal  of 
railway  properties  throughout  the  United  States  is  now 
being  made  under  the  supervision  of  the  Interstate  Com- 
merce Commission.  Many  different  standards  of  valua- 
tion are  possible.  The  entire  technique  of  railway  valua- 
tion is  now  in  the  process  of  development,  and  there  is 
great  divergence  in  the  principles  accepted  by  courts, 
commissions,  and  students. 

«  169  U.  S.  466. 


The  Regulation  of  Railway  Rates  103 

MABKET   VALUE 

The  valuation  of  railway  property  on  the  basis  of  earn- 
ing capacity,  though  often  urged  by  railway  advocates,  is 
clearly  an  improper  method  of  determining  the  fair  value 
upon  which  railways  are  entitled  to  a  fair  return.  The 
market  value  of  the  property  which  such  a  valuation 
would  produce  must  itself  be  dependent  upon  the  earn- 
ings whose  reasonableness  is  in  question.  To  say  that 
railway  rates  should  be  reasonable  and  at  the  same  time 
to  insist  that  their  reasonableness  must  be  tested  by  the 
return  which  they  yield  on  a  value  dependent  upon  the 
income  produced  by  these  very  rates  is  clearly  to  argue 
in  a  circle.  Such  valuation  is  commercial  rather  than 
physical.  It  would  nullify  all  attempts  at  rate  regulation 
by  absorbing  monopoly  as  well  as  legitimate  profits.  For 
rate-making  purposes,  in  a  public  service  enterprise,  earn- 
ing capacity  cannot  serve  as  an  adequate  or  as  a  desirable 
basis  of  valuation.  Whitten,  in  his  standard  work  on  the 
valuation  of  public  service  corporations,  says : 

Market  value  has  nothing  to  do  with  the  rate  question.  .  .  . 
It  is  only  set  up  after  the  rates  are  in  fact  determined.  To  be 
sure,  the  theory  is  that  rates  are  based  on  a  fair  return  on  the 
market  value  of  the  road  under  reasonable  rates.  The  impossi- 
bility of  basing  reasonable  rates  on  a  market  value  that  is  itself 
determined  by  reasonable  rates  is  apparent.  It  is  a  clear  case 
of  reasoning  in  a  circle.  We  have  the  evident  absurdity  of 
requiring  the  answer  to  the  problem  before  we  can  undertake  its 
solution.  The  advocates  of  the  market-value  theory  cannot  really 
mean  what  they  say.  Market  value  is  not  really  a  part  of  the 
process,  but  the  final  result.  It  includes  in  many  cases  a  capi- 
talization of  certain  monopoly  profits  and  the  monopoly  value 
thus  created  is  set  up  as  justifying  the  higher  rates  which  have, 
in  fact,  created  the  monopoly  value.18 

is  E.  H.  Whitten,  Valuation  of  Public  Service  Corporations,  1,  §  57. 


104  Railway  Regulation 

There  are  two  other  standards  of  valuation,  each  more 
reasonable  than  market  value  based  upon  earning  capac- 
ity, which  claim  many  staunch  supporters  and  are  largely 
applied  in  practice ;  namely,  actual  cost  and  present  value. 

ACTUAL    COST 

Actual  cost,  in  its  proper  sense,  includes  the  cost  of 
original  construction  plus  the  cost  of  additions  and  bet- 
terments. It  is  not  equivalent  to  book  value,  as  has  been 
assumed  in  a  number  of  commission  and  judicial  decisions, 
and  should  not  properly  include,  therefore,  such  items  as 
"discount  on  securities  issued,  exorbitant  profits  to  pro- 
moters, cost  of  replacing  worn-out  or  superseded  prop- 
erty, dividends  paid  out  of  capital,  money  sunk  in  unsuc- 
cessful experiments. "  19 

Actual  cost  presents  the  most  natural  standard  of  value 
for  rate-making  purposes.  A  railroad  corporation  is  en- 
titled to  a  reasonable  return  on  its  investment,  and  the 
actual  cost  involved  in  the  creation  of  the  property  de- 
voted to  the  public  service  is  the  most  direct  and  the  most 
obvious  measure  of  the  investment.  In  the  Western  Bate 
Advance  Case  of  1911  the  Interstate  Commerce  Commis- 
sion said: 

Perhaps  the  nearest  approximation  to  a  fair  standard  is  that 
of  bona  fide  investment — the  sacrifice  made  by  the  owners  of 
the  property — considering  as  part  of  the  investment  any  shortage 
of  return  that  there  may  be  in  the  early  years  of  the  enterprise.20 

But  while  actual  cost  is  coming  to  be  recognized  by 
many  keen  and  able  students  of  the  problem  as  the  most 
desirable  standard  of  railway  valuation,  it  has  not  re- 
ceived very  extensive  legal  approval.  The  difficulties 

i»  Whitten,  1,  §  95. 
20  20  I.  C.  C.  Itep.  307. 


The  Regulation  of  Railway  Rates  105 

involved  in  the  determination  of  actual  cost,  because  of 
the  unsoundness  and  inaccuracy  of  early  accounting  prac- 
tices and  the  lack  or  inadequacy  of  historical  records, 
have  been  the  chief  obstacles  to  the  acceptance  of  this 
standard  of  valuation.  It  has  been  urged,  in  addition, 
that  such  a  basis  of  valuation  would  impose  upon  the  pub- 
lic the  burden  of  unwise  or  dishonest  investments  and  de- 
prive the  railroads  of  a  just  return,  appearing  in  the 
enhanced  value  of  their  properties,  for  unusual  enterprise 
or  exceptional  efficiency. 

PRESENT   VALUE 

The  present  value  of  railway  property,  then,  is  usually 
taken  by  courts  and  commissions  as  the  legal  measure  of 
the  investment  upon  which  a  fair  return  may  be  earned. 
Present  value  is  determined  by  ascertaining  the  cost  of 
reproducing  the  property  new,  with  such  deduction  for 
depreciation  as  will  make  the  value  so  obtained  reflect  the 
present  condition  of  the  plant. 

This  method  of  valuation,  it  is  claimed,  is  free  from  the 
difficulties  and  objections  which  are  alleged  to  stand  in 
the  way  of  the  actual  cost  basis.  It  is  urged  that  the  pub- 
lic is  entitled  to  service  at  such  rates  as  will  yield  a  fair 
return  on  an  investment  that  would  be  necessary  for  the 
provision  of  this  service  at  the  present  time,  and  that  the 
railroads  are  entitled  to  a  fair  return  on  such  an  invest- 
ment as  would  have  to  be  made  at  the  present  time  in  order 
to  provide  this  service. 

Nevertheless,  the  present-value  basis  has  been  sub- 
jected, particularly  in  recent  years,  to  very  sharp  attack. 
For  example,  Professor  Bemis,  an  expert  in  railway  val- 
uation, has  said : 

The  "reproduction  theory"  contemplates  an  imaginary  com- 
munity in  which  an  imaginary  corporation  makes  imaginary 


106  Railway  Regulation 

estimates  of  the  cost  of  an  imaginary  railroad.  .  ...  The 
actual,  efficient  sacrifice  of  the  investor,  as  revealed  in  accounting 
and  other  historical  studies,  supplemented  by  engineering  advice 
as  to  the  adaptability  and  present  condition  of  the  properties 
for  the  purpose  intended,  will  count  far  more  than  the  estimates 
of  engineers  as  to  what  it  will  cost  to  buy  land  that  will  never 
be  bought  again,  to  duplicate  property  that  will  never  have  to  be 
duplicated,  and  to  build  up  a  business  that  will  never  again  have 
to  be  developed.21 

In  spite  of  keen  criticism  and  respectable  opposition, 
present  value,  or  cost  of  reproduction  less  depreciation, 
is  the  generally  accepted  legal  standard  of  railway 
valuation. 

PEOBLEMS   IN   VALUATION 

In  the  application  of  this  cost-of -reproduction  theory 
many  difficult,  and  for  the  most  part  still  unsettled,  prob- 
lems have  arisen.  There  is,  for  example,  the  question  as 
to  how  far  intangible  elements  shall  be  included  in  de- 
termining the  cost  of  reproduction  of  an  existing  plant. 
Shall  any  value  be  attributed  to  the  existence  of  good-will, 
or  to  the  fact  that  the  enterprise  is  a  going  concern  I  Dif- 
ferent answers  are  given  to  this  question  in  different 
jurisdictions,  and  scarcely  anywhere  is  the  answer  definite 
and  final.  There  is  the  question,  too,  as  to  whether  allow- 
ance shall  be  made  for  the  appreciation  of  railway  prop- 
erty, as  well  as  deduction  for  its  depreciation.  The 
answer  to  this  question  is  also  varied  and  inconclusive. 

One  of  the  most  important  of  these  problems  concerns 
the  valuation  of  railway  lands  and  rights  of  way.  On  the 
basis  of  cost  of  reproduction  the  railroads  should  clearly 

21  E.  W.  Bemis,  in  the  Proceedings  of  the  National  Association  of  Rail- 
way Commissioners,  1913. 


The  Regulation  of  Railway  Rates  107 

be  allowed  the  present  value  of  their  lands,  and  not  merely 
the  expenditure  involved  in  their  acquisition.  But  how 
is  present  value  to  be  determined?  Is  it  equivalent  to  the 
value  of  adjoining  lands,  or  must  it  be  computed  on  the 
basis  of  what  the  railways  would  have  to  pay  for  such 
lands  if  they  were  to  be  acquired  for  railway  purposes  at 
the  present  time!  To  estimate  the  value  of  rights  of  way 
on  the  basis  of  the  value  of  adjoining  lands  is  to  allow  the 
railways  the  benefit  of  the  so-called  unearned  increment, 
that  is,  of  the  appreciation  in  property  values  resulting 
from  the  general  growth  of  the  community.  To  estimate 
the  value  of  rights  of  way  on  the  basis  of  what  would  have 
to  be  paid  for  these  lands  at  the  present  time  for  railway 
purposes  is  to  sanction  the  use  of  so-called  multipliers, 
because,  it  is  claimed,  land  for  railway  purposes  has  a 
normal  market  value  of  two  or  three  times  the  market 
value  of  the  same  land  for  other  than  railway  purposes. 
The  latest  and  most  authoritative  answer  to  this  problem, 
as  well  as  a  profitable  discussion  of  the  cost-of -reproduc- 
tion theory  as  a  whole,  was  given  in  the  famous  Minne- 
sota Rate  Case  of  1913.22 

THE  MINNESOTA  RATE  CASE 

In  this  case  suits  were  brought  by  stockholders  of  the 
Northern  Pacific  Railway  Company,  the  Great  Northern 
Railway  Company,  and  the  Minneapolis  and  St.  Louis 
Railroad  Company  to  restrain  the  enforcement  of  two 
orders  of  the  Minnesota  Railroad  and  Warehouse  Com- 
mission and  two  acts  of  the  Minnesota  legislature,  pre- 
scribing maximum  freight  and  passenger  rates,  and  to 
prevent  the  adoption  or  maintenance  of  these  rates  by  the 
railroad  companies. 

22  230  U.  S.  352. 


108  Railway  Regulation 

The  grounds  of  complaint  were,  first,  that  the  action  of 
the  legislature  and  the  commission  amounted  to  an  un- 
constitutional interference  with  interstate  commerce,  and 
second,  that  the  rates  established  were  confiscatory.  The 
first  of  these  problems,  dealing  with  the  respective  rights 
of  the  states  and  the  national  government  in  railway  regu- 
lation, will  be  treated  in  a  later  chapter.  The  second  prob- 
lem involved  the  legality  of  the  valuation  on  the  basis  of 
which  the  reasonableness  of  the  rates  fixed  by  the  legisla- 
ture and  the  commission  was  to  be  determined.  More 
particularly,  the  principles  of  land  valuation  received  the 
careful  consideration  of  the  Court.  The  issue  and  the 
conclusion  may  best  be  stated,  somewhat  at  length,  in  the 
words  of  Mr.  Justice  Hughes,  who  delivered  the  opinion 
of  the  Court : 

That  question  is  whether,  in  determining  the  fair  present  value 
of  the  property  of  the  railroad  company  as  a  basis  of  its  charges 
to  the  public,  it  is  entitled  to  a  valuation  of  its  right  of  way  not 
only  in  excess  of  the  amount  invested  in  it,  but  also  in  excess 
of  the  market  value  of  contiguous  and  similarly  situated  prop- 
erty. For  the  purpose  of  making  rates,  is  its  land  devoted  to 
the  public  use  to  be  treated  (irrespective  of  improvements)  not 
only  as  increasing  in  value  by  reason  of  the  activities  and  general 
prosperity  of  the  community,  but  as  constantly  outstripping  in 
this  increase  all  neighboring  lands  of  like  character,  devoted  to 
other  uses?  If  rates  laid  by  competent  authority,  state  or 
national,  are  otherwise  just  and  reasonable,  are  they  to  be  held 
to  be  unconstitutional  and  void,  because  they  do  not  permit  a 
return  upon  an  increment  so  calculated? 

It  is  clear  that  in  ascertaining  the  present  value  we  are  not 
limited  to  the  consideration  of  the  amount  of  the  actual  invest- 
ment. If  that  has  been  reckless  or  improvident,  losses  may  be 
sustained  which  the  community  does  not  underwrite.  As  the 
company  may  not  be  protected  in  its  actual  investment,  if  the 
value  of  its  property  be  plainly  less,  so  the  making  of  a  just 


The  Regulation  of  Railway  Rates  109 

return  for  the  use  of  the  property  involves  the  recognition,  of 
its  fair  value,  if  it  be  more  than  the  cost.  The  property  is  held 
in  private  ownership,  and  it  is  that  property,  and  not  the  original 
cost  of  it,  of  which  the  owner  may  not  be  deprived  without  due 
process  of  law.  But  still  it  is  property  employed  in  a  public 
calling,  subject  to  governmental  regulation,  and  while,  under  the 
guise  of  such  regulation,  it  may  not  be  confiscated,  it  is  equally 
true  that  there  is  attached  to  its  use  the  condition  that  charges 
to  the  public  shall  not  be  unreasonable.  And  where  the  inquiry 
is  as  to  the  fair  value  of  the  property,  in  order  to  determine  the 
reasonableness  of  the  return  allowed  by  the  rate-making  power, 
it  is  not  admissible  to  attribute  to  the  property  owned  by  the 
carriers  a  speculative  increment  of  value,  over  the  amount 
invested  in  it  and  beyond  the  value  of  similar  property  owned  by 
others,  solely  by  reason  of  the  fact  that  it  is  used  in  the  public 
service.  That  would  be  to  disregard  the  essential  conditions  of 
the  public  use,  and  to  make  the  public  use  destructive  of  the 
public  right. 

The  increase  sought  for  "railway  value"  in  these  cases  is  an 
increment  over  all  outlays  of  the  carrier  and  over  the  values  of 
similar  land  in  the  vicinity.  It  is  an  increment  which  cannot  be 
referred  to  any  known  criterion,  but  must  rest  on  a  mere  expres- 
sion of  judgment  which  finds  no  proper  test  or  standard  in  the 
transactions  of  the  business  world.  It  is  an  increment  which, 
in  the  last  analysis,  must  rest  on  an  estimate  of  the  value  of  the 
railroad  use  as  compared  with  other  business  uses ;  it  involves  an 
appreciation  of  the  returns  from  rates  (when  rates  themselves 
are  in  dispute)  and  a  sweeping  generalization  embracing  sub- 
stantially all  the  activities  of  the  community.  For  an  allowance 
of  this  character  there  is  no  warrant. 

Assuming  that  the  company  is  entitled  to  a  reasonable  share 
in  the  general  prosperity  of  the  communities  which  it  serves,  and 
thus  to  attribute  to  its  property  an  increase  in  value,  still  the 
increase  so  allowed,  apart  from  any  improvements  it  may  make, 
cannot  properly  extend  beyond  the  fair  average  of  the  normal 
market  value  of  land  in  the  vicinity  having  a  similar  character. 


110  Railway  Regulation 

Otherwise  we  enter  the  realm  of  mere  conjecture.  We  there- 
fore hold  that  it  was  error  to  base  estimates  of  value  of  the 
right  of  way,  yards,  and  terminals  upon  the  so-called  "rail- 
way use"  of  the  property.  The  company  would  certainly  have 
no  ground  of  complaint  if  it  were  allowed  a  value  for  these  lands 
equal  to  the  fair  average  market  value  of  similar  land  in  the 
vicinity,  without  additions  by  the  use  of  multipliers,  or  other- 
wise, to  cover  hypothetical  outlays.  The  allowances  made  below 
for  conjectural  cost  of  acquisition  and  consequential  damages 
must  be  disapproved,  and,  in  this  view,  we  also  think  it  was  error 
to  add  to  the  amount  taken  as  the  present  value  of  the  lands  the 
further  sums,  calculated  on  that  value,  which  were  embraced  in 
the  items  of  "engineering,  superintendence,  legal  expenses," 
"contingencies,"  and  "interest  during  construction." 

The  principles  of  railway  valuation  are  thus  being  au- 
thoritatively developed  by  courts  and  commissions,  and 
satisfactory  solutions  are  gradually  being  reached  for 
the  more  difficult  outstanding  problems.  Of  all  the  ques- 
tions in  the  field  of  railway  regulation,  the  theories  and 
methods  of  valuation  are  now  receiving  the  widest  and 
most  thorough-going  attention.  The  comprehensive  phys- 
ical valuation  of  the  American  railway  net,  which  is  be- 
ing conducted  at  the  present  time  by  the  Interstate  Com- 
merce Commission  with  the  willing  co-operation  of  the 
railways,  will  doubtless  result  in  a  substantial  contri- 
bution to  the  proper  treatment  of  the  many  railway 
valuation  problems.  Through  the  excellent  process  of 
careful  investigation,  enlightened  discussion,  and  judi- 
cial decision  a  sound  legal  and  economic  basis  of  rate 
reasonableness  will  be  gradually  established. 


The  Regulation  of  Railway  Rates  HI 

TEST  QUESTIONS 

1.  On  what  grounds  did  the  United  States  Supreme  Court 
uphold  the  regulation  of  railways  by  the  states? 

2.  State  briefly  the  limitation  of  the  Interstate  Commerce  Com- 
mission's  authority  by  the  courts. 

3.  What  standard  of  rate  reasonableness  was  set  forth,  in  Jus- 
tice Harlan  's  decision  in  Smyth  v.  Ames  ? 

4.  What  effect   did   this   decision  have   in  emphasizing  the 
importance  of  physical  valuation  of  railways  ? 

5.  Why  cannot  earning  capacity  be  taken  as  a  basis  for  valua- 
tion for  rate-making  purposes? 

6.  Discuss  briefly  actual  cost  and  present  value  in  the  deter- 
mination of  reasonable  rates. 

7.  Give  the  substance  of  the  Supreme  Court  decision  in  the 
Minnesota  Rate  Case  of  1913. 


CHAPTEE  VII 
RAILWAY  DISCRIMINATION 

THE  CAUSES  OF  EAILWAY  DISCRIMINATION 

We  have  seen  in  an  earlier  chapter  that  railway  dis- 
crimination, like  general  rate-cutting,  springs  primarily 
from  the  very  nature  of  the  railway  business.  Now  and 
then  special  or  exceptional  causes  appear.  Railway  man- 
agers occasionally  allow  preferential  rates  as  a  means  of 
stimulating  traffic  at  a  particular  juncture  in  order  to  be 
able  to  issue  favorable  reports  for  their  roads  and  thereby 
enhance  the  market  value  of  their  securities.  It  also  hap- 
pens not  infrequently  that  railway  companies  are  finan- 
cially interested  in  manufacturing  plants  or  in  mining 
enterprises  along  their  rights  of  way,  and  hence  find  it  a 
matter  of  especial  advantage  to  quote  unduly  favorable 
rates  to  such  concerns  as  against  their  competitors.  -In 
like  manner,  the  existence  of  interlocking  directorates, 
whereby  railway  officers  serve  at  the  same  time  as  direc- 
tors of  industrial  enterprises,  often  results  in  concessions 
to  special  interests. 

Primarily,  however,  discriminatory  practices  are  re- 
sorted to  because  of  the  compelling  desire  to  increase  rail- 
way traffic  as  a  means  of  enlarging  railway  profits.  Every 
increase  in  business  results  in  much  more  than  a  propor- 
tionate increase  in  net  returns.  There  is  a  powerful  stim- 
ulus to  add  to  a  railway's  traffic,  and  the  rivalry  for  busi- 
ness becomes  irresistibly  keen.  In  the  absence  of  public 
control,  therefore,  railway  managers,  imbued  primarily 

112 


Railway  Discrimination  113 

with  the  spirit  of  private  gain,  are  determined  to  obtain 
business  at  any  cost.  Discrimination  in  rates  and  service 
is  bound  to  follow.  Here,  as  elsewhere  in  our  analysis,  it 
becomes  clear  that  the  economic  characteristics  of  the  rail- 
way business — the  fact  that  railway  expenditures  are 
largely  joint  and  constant,  that  railway  undertakings  are 
subject  to  increasing  returns,  that  the  passion  for  railway 
traffic  is  keen  and  uncontrollable,  that  railway  competition 
normally  leads  to  its  own  destruction — are  the  underlying 
sources  of  the  evil.  In  other  words,  unregulated  railway 
enterprise  inevitably  results  in  discriminatory  practices. 
The  railways  have  voluntarily  built  up  industrial  monopo- 
lies through  special  favors  as  a  means  of  furthering  their 
own  ends,  and  have  subsequently  been  compelled  to  con- 
tinue their  discriminations  because  of  the  pressure  which 
these  powerful  monopolies  have  brought  to  bear  upon 
them.  And  even  in  the  first  instance,  industrial  concerns 
have  often  secured  special  treatment  from  the  railways  by 
recognizing  the  railways '  peculiar  dependence  upon  large 
traffic  and  by  playing  one  road  off  against  another. 

These  underlying  causes  of  discrimination  have  often 
been  recognized  and  stated  by  railway  officials  as  well  as 
by  public  authorities.  A  classical  exposition  of  the  cir- 
cumstances which  lead  to  discrimination  may  be  found  in 
the  testimony  of  a  railroad  man  (Mr.  C.  M.  Wicker  of 
Chicago)  before  the  Cullom  Committee  of  the  United 
States  Senate  in  the  investigation  of  1886.  He  said : 

Here  is  quite  a  grain  point  in  Iowa,  where  there  are  five  or 
six  elevators.  As  a  railroad  man  I  would  try  and  hold  all  these 
dealers  on  a  level  keel,  and  give  them  all  the  same  traffic  rate. 
But  suppose  there  was  a  road  five  or  six  miles  across  the  country 
and  all  these  dealers  should  begin  to  drop  in  on  me  every  day 
or  two  and  tell  me  that  the  road  across  the  country  was  reaching 
within  a  mile  or  two  of  our  station  and  drawing  to  itself  all  the 


114  Railway  Regulation 

grain.  You  might  say  that  it  would  be  the  right  and  just  thing 
to  do  to  give  all  the  five  or  six  dealers  at  the  station  a  special 
rate  to  meet  that  competition  through  the  country.  But,  as  a 
railroad  man,  I  can  accomplish  the  purpose  better  by  picking 
out  one  good,  smart,  live  man,  and,  giving  him  a  concession  of 
three  or  four  cents  a  hundred,  let  him  go  there  and  scoop  the 
business.  I  would  get  the  tonnage,  and  that  is  what  I  want. 
But  if  I  give  it  to  the  five  it  is  known  in  a  very  short  time. 

The  Interstate  Commerce  Commission,  in  its  twelfth 
annual  report,  givesjike  recognition  to  these  factors  and 
describes  the  causes  of  railway  discrimination  as  follows : 

Generally  speaking,  he  (the  railroad  manager)  feels  that  he 
must  have  the  traffic.  His  road  is  there  and  it  can  be  used  for 
nothing  else.  The  property  with  which  he  stands  charged  may 
be  seriously  injured  without  that  particular  traffic,  and  he  must 
get  it  when  it  is  moving.  He  cannot  lie  idle  for  better  prices 
or  more  prosperous  conditions.  There  is  therefore  a  constant 
temptation  to  obtain  it  at  any  cost.  Now,  the  rates  between 
two  competitive  points  have  been  published.  The  manager  of 
one  road  finds  that  business  has  abandoned  his  line,  and  he 
believes  that  it  is  moving  by  a  rival  route.  He  can  draw  but 
one  inference,  and  that  is,  that  his  competitor  has  secretly  reduced 
the  rate.  Under  these  circumstances,  what  shall  he  do?  Shall 
he  maintain  the  published  rate  and  thereby  abandon  business? 
But  that  means  disaster  to  his  road,  the  loss  of  his  reputation  as 
a  manager,  and  ultimately  of  his  employment.  What  most  man- 
agers actually  do  is  to  get  the  business  by  making  whatever  rate 
is  necessary.1 

THE  NATURE  OF  DISCRIMINATORY  PRACTICES 
THEIR  GENERAL  CHARACTERISTICS 

Eailway  discriminations  assume  innumerable  forms 
and  appear  in  almost  every  conceivable  disguise.  They 

i  Twelfth  Annual  Report  of  Interstate  Commerce  Commission,  12. 


Railway  Discrimination  115 

may  be  characterized  in  a  great  variety  of  ways.  They 
are  usually  classified  as  discriminations  between  com- 
modities or  different  kinds  of  traffic,  between  localities  or 
different  sections  of  the  country,  and  between  persons  or 
different  shippers.  Before  the  enactment  of  restrictive 
legislation,  particularly  in  the  years  prior  to  the  passage 
of  the  Act  to  Regulate  Commerce,  railway  discriminations, 
whether  between  persons,  commodities,  or  localities,  were 
resorted  to  openly.  The  growth  of  hostile  legislation  has 
driven  most  of  these  practices  under  cover.  This  is  true, 
however,  only  of  personal  discrimination.  Discrimination 
between  commodities  and  between  localities  may  still  be 
practiced  openly ;  it  results  from  every  -maladjustment  of 
the  freight  classification  and  from  every  undue  disregard 
of  distance  in  the  freight  tariff.  The  published  rates, 
therefore,  lawfully  adhered  to,  not  infrequently  operate 
to  the  undue  preference  or  advantage  of  some  and  to  the 
undue  prejudice  or  disadvantage  of  others.  Even  today, 
then,  railway  discriminations  are  both  open  and  secret. 

Moreover,  the  special  privileges  sought  to  be  granted 
through  discriminatory  practices  are  made  available  for 
the  favored  shipper,  commodity,  or  locality  through  direct, 
easily  discovered  practices,  or  through  indirect  methods, 
difficult  of  discovery.  This  appears,  obviously,  from 
the  fact  that  discriminations  are  granted  through  differ- 
ences in  the  service  rendered  for  the  same  charge,  or 
through  external  advantages,  as  well  as  through  prefer- 
ential rates.  That  indirect  preferences,  exceedingly  diffi- 
cult to  uncover  and  prove,  are  now  chiefly  resorted  to  by 
railways  and  shippers,  becomes  most  clear  however  from 
an  examination  of  the  methods  followed  in  effecting  per- 
sonal discrimination.  The  early  and  very  crude  form  of 
carrying  goods  for  favored  shippers  free  or  at  reduced 
rates  has  for  the*  most  part  been  entirely  relinquished. 


116  Railway  Regulation 

And  the  little  less  crude  form  of  charging  the  full  rate 
nominally  and  effecting  the  discrimination  through  the 
repayment  of  part  of  the  rate  has  likewise  been  aban- 
doned to  a  very  large  extent.  The  expedients  resorted 
to  for  granting  rebates  are  more  subtle  and  refined. 
Because  of  their  comparative  immunity  from  discovery 
and  consequent  governmental  attack  they  have  properly 
been  denominated  "smokeless  rebates."  We  shall  note 
concrete  examples  of  these  modern  practices  in  our  sub- 
sequent consideration  of  the  forms  of  railway  discrimi- 
nation. 

JUST  AND  UNJUST  DISCRIMINATION 

It  is  important  to  recognize  that  not  all  discriminatory 
practices  are  economically  undesirable  or  legally  pro- 
hibited. Certain  forms  of  discrimination  are  almost  uni- 
versally accepted  as  fair  and  proper,  being  justified  by 
considerations  of  social,  economic,  or  political  policy. 
The  distinction  between  different  classes  of  traffic  as  a 
result  of  which  more  rapid  transportation  is  provided 
for  perishable  goods  than  for  ordinary  commodities  is 
always  approved.  So,  too,  the  discrimination  between 
localities  which  is  evidenced  by  special  homeseekers'  or 
colonists'  rates  is  seldom  regarded  as  open  to  objection. 
Other  forms  of  discrimination,  many  of  them  as  between 
persons,  are  specifically  authorized  in  the  statutes  of  the 
states  and  of  the  nation.  The  Act  to  Eegulate  Commerce, 
for  example,  permits  the  transportation  of  property  free 
or  at  reduced  rates  for  the  national,  state,  or  municipal 
governments,  or  for  charitable  purposes,  or  to  and  from 
fairs  and  expositions  for  exhibit  thereat;  it  allows  the 
issue  of  mileage  books  under  certain  conditions;  it  per- 
mits the  interchange  of  passes  for  the  officers,  agents, 
and  employees  of  common  carriers  and  their  families; 


Railway  Discrimination  117 

it  authorizes  free  transportation  in  case  of  general  epi- 
demic, pestilence,  or  other  calamitous  visitation;  and  it 
provides  that  free  transportation  may  be  given  to  certain 
specifically  enumerated  classes  of  persons.2 

Furthermore,  the  principle  of  discrimination  is  rec- 
ognized both  in  the  classification  of  freight  and  in  the 
making  of  rates.  The  very  idea  of  classifying  commodi- 
ties or  departing  from  distance  in  the  freight  tariff 
involves  discrimination  between  commodities  and  between 
localities.  Whether  such  discrimination  is  desirable  and 
proper  depends  largely  upon  its  reasonableness  in  each 
particular  case.  Most  classifications  are  clearly  reason- 
able and  necessary;  it  is  undesirable,  as  we  have  already 
seen,  from  the  standpoint  both  of  the  railways  and  of 
the  public,  to  charge  equal  rates  on  all  classes  of  commod- 
ities. In  like  manner,  the  existence  of  competition, 
between  markets  as  well  as  between  routes,  necessitates 
a  departure  from  a  strict  adherence  to  the  distance  prin- 
ciple in  rate-making.  It  is  unjust  or  undue  or  unreason- 
able discrimination  between  localities  that  is  economically 
and  legally  indefensible. 

This  distinction  between  just  and  unjust  railway  dis- 
crimination is  uniformly  recognized  in  American  legisla- 
tion, both  state  and  national.  The  Act  to  Eegulate 
Commerce,  for  example,  prohibits  as  unjust  discrimina- 
tion preferential  treatment  for  a  "like  or  contempo- 
raneous service  in  the  transportation  of  a  like  kind  of 
traffic  under  substantially  similar  circumstances  and 
conditions. ' ' 3  Discrimination  as  such  is  not  prohibited ; 
the  law  takes  cognizance  of  due  justification  for  prefer- 
ential treatment.  And  again,  the  Act  expressly  declares 
it  to  be  unlawful  for  a  common  carrier  "to  make  or  give 

2  Act  to  Eegulate  Commerce,  as  amended,  sec.  22. 

3  Ibid.,  sec.  2. 


118  Railway  Regulation 

any  undue  or  unreasonable  preference  or  advantage  to 
any  particular  person,  company,  firm,  corporation,  or 
locality,  or  any  particular  description  of  traffic,'7  or  to 
subject  the  same  "to  any  undue  or  unreasonable  preju- 
dice or  disadvantage. ' ' 4  The  emphasis  is  clearly  upon 
undue  or  unreasonable  preference  or  advantage  and  upon 
undue  or  unreasonable  prejudice  or  disadvantage.  Under 
these  provisions  the  so-called  differentials — when,  for  ex- 
ample, lower  rates  are  established  from  western  points 
to  Baltimore  than  to  New  York,  for  the  purpose  of 
allowing  Baltimore  some  share  of  the  import  and  export 
trade  of  the  country — have  been  properly  upheld;  and 
in  like  manner,  the  railway  practice  of  granting  lower 
rates  on  imported  goods  or  on  goods  intended  for  export 
than  on  purely  domestic  shipments  may  be  deemed  law- 
ful. Large  questions  of  policy  inevitably  arise  in  this 
differentiation  between  just  and  unjust  discrimination, 
and  sharp  conflicts  have  resulted  from  the  interpreta- 
tion by  judicial  tribunals  of  these  legislative  provisions 
as  applied  by  administrative  commissions ;  but  that  such 
differentiation  is  both  necessary  and  proper  appears  to 
be  established  beyond  question.  The  problem  of  pre- 
venting unjust  discrimination,  then,  particularly  as  be- 
tween different  commodities  or  categories  of  traffic  and 
as  between  different  localities  or  sections  of  the  country, 
presents  one  of  the  most  complex  and  most  difficult  tasks 
in  railway  regulation. 

THE  FOKMS  OP  RAILWAY  DISCRIMINATION 
THEIR  INTERDEPENDENCE 

Kailway  discriminations,  we  have  seen,  are  usually 
classified  as  discriminations  between  commodities,  be- 

4  Ibid.,  sec.  3. 


Railway  Discrimination  119 

tween  localities,  and  between  persons.  In  the  end  all 
discriminations  are  personal:  they  operate  to  the  ad- 
vantage or  prejudice  of  particular  shippers  or  consignees. 
In  the  case  of  discriminations  between  commodities  or 
between  localities,  however,  the  basis  of  the  preference 
consists  in  the  shipper's  offering  a  particular  class  of 
goods  for  transportation  or  in  the  fact  that  the  ship- 
ment originates  in  or  is  destined  for  a  particular  place. 
All  shippers  of  the  given  class  of  commodities  and  all 
persons  offering  goods  to  or  from  the  given  place  are 
afforded  equal  treatment.  In  the  case  of  personal  dis- 
crimination, on  the  other  hand,  the  identity  of  the  par- 
ticular shipper  is  the  basis  of  the  preference.  A  favored 
shipper,  then,  may  receive  his  undue  preference  or  ad- 
vantage because  he  is  shipping  goods  of  a  special  class ; 
because  he  is  shipping  goods  to  or  from  a  special  place; 
or  because  he,  rather  than  one  of  his  competitors,  hap- 
pens to  be  the  consignor  of  the  shipment. 

DISCBIMIKATION   BETWEEN   COMMODITIES 

Discrimination  between  commodities  manifests  itself 
primarily  in  the  classification  of  freight.5  Special  serv- 
ice regulations  are  also  made,  applicable  only  to  par- 
ticular classes  of  traffic.  Whether  a  given  classification 
or  regulation  is  just  and  proper  depends  upon  the  rea- 
sonableness of  the  adjustment  in  that  particular  case. 
The  principles  upon  which  such  proper  adjustment  must 
be  based  have  been  discussed  in  some  detail  in  an  earlier 
chapter.6  Value  of  service,  measured  roughly  by  the 

6  ' « All  classification  is  discrimination.  It  is  the  segregation  of  things, 
which,  from  the  special  viewpoint  of  the  classifier,  are  different,  and  the 
grouping  of  things,  which,  from  his  viewpoint,  are  similar. ' ' — S.  O.  Dunn, 
The  American  Transportation  Question,  47. 

6  This  subject  is  treated   in  exhaustive  detail  in  the  more  technical 


120  Railway  Regulation 

relative  values  of  different  commodities,  is  the  control- 
ling factor  in  classification,  though  cost  of  service  is 
given  serious  consideration  by  both  railways  and  com- 
missions. A  few  illustrations,  in  this  place,  will  make 
more  concrete  the  nature  of  these  discriminations. 

The  Interstate  Commerce  Commission  has  been  called 
upon  to  adjust  relative  rates  between  competitive  and 
non-competitive  commodities.  In  the  case  of  competitive 
commodities,  there  is  the  problem  of  classifying  articles 
offered  for  transportation  in  different  stages  of  manu- 
facture, their  relative  rates  being  an  important  factor 
in  determining  the  place  where  the  later  stages  of  manu- 
facture shall  be  carried  on,  and  the  allied  problem  of 
classifying  articles  which  may  be  used  as  possible  sub- 
stitutes for  each  other,  their  relative  rates  being  an 
important  factor  in  determining  which  one  shall  prevail. 

With  regard  to  competitive  commodities  in  different 
stages  of  manufacture,  the  Commission  ordered  that  the 
rate  on  unfinished  bed-room  sets  should  be  85  per  cent 
of  the  rate  on  the  finished  articles.7  On  the  same  prin- 
ciple, the  Commission  condemned  the  practice  of  classi- 
fying hatters'  furs  and  fur  scraps  as  double  first  class, 
while  fur  hats,  the  finished  product,  were  designated  as 
first  class.8  In  like  manner,  the  Commission  allowed  a 
differential  of  3  cents  per  100  pounds  on  the  transporta- 
tion of  corn  meal  as  compared  with  corn  from  the  Mis- 
souri river  to  points  in  Texas,9  and  a  differential  of 

volumes  on  classifications  and  rates  which  constitute  the  chief  part  of  the 
course  in  Interstate  Commerce  and  Eailway  Traffic. 

7  Potter  Mfg.  Co.  v.  C.  &  G.  T.  Ey.  Co.  et  aL,  5  I.  C.  C.  Eep.  514;  4 
I.  C.  R.  223. 

8  Myer  v.  C.  C.  C.  &  St.  L.  Ey.  Co.  et  al.,  9  I.  C.  C.  Eep.  78. 

9  11  I.  C.  C.  Eep.  220. 


Railway  Discrimination  121 

5  cents  on  the  transportation  of  these  commodities  from 
the  Missouri  river  to  the  Pacific  coast.10 

The  best  example  of  the  adjustment  of  rates  between 
competitive  commodities  which  may  be  used  as  possible 
substitutes  for  each  other  is  to  be  found  in  the  decision 
of  the  Commission  as  to  the  relative  rates  which  should 
prevail  on  Pearline  and  common  soap.11  The  question 
was  as  to  the  rates  on  these  two  commodities  between 
New  York  and  Atlanta.  Pearline  appeared  in  class  four 
of  the  Southern  Classification,  with  a  rate  of  73  cents  per 
100  pounds;  common  soap  appeared  in  class  six,  which 
would  normally  have  given  it  a  rate  of  49  cents,  but 
received  a  special  rate  of  33  cents  per  100  pounds  be- 
cause of  the  existence  of  water  competition  between  New 
York  and  Atlanta.  It  was  shown  that  Pearline  could  be 
used  as  a  substitute  for  common  soap  and  was  in  direct 
competition  with  it;  that  Pearline  was  about  twice  as 
valuable  as  the  soap  and  the  risk  of  carrying  it  a  little 
greater;  and  that  the  water  competition  at  Savannah, 
which  reduced  the  rate  on  soap  to  Atlanta,  was  not 
applicable  to  Pearline  because  it  could  not  move  by 
water  on  account  of  its  susceptibility  to  dampness.  The 
Commission  decided  that  there  was  undue  discrimination 
against  Pearline  and  ordered  that  it  be  placed  in  class 
five,  with  a  rate  of  60  cents  per  100  pounds.  This  rate 
was  still  almost  twice  the  rate  on  common  soap.  The 
Commission  based  its  decision  largely  on  the  value-of- 
service  principle.12 

10  11  I.  C.  C.  Eep.  212. 

11  James  Pyle  &  Sons  v.  E.  T.  V.  &  G.  E.  E.  Co.,  1  I.  C.  C.  Eep.  465. 

12  "The  decision  seems  to  rest  chiefly  on  the  difference  in  the  value  of 
the  two  commodities,  though  it  should  be  noticed  that  two  other  considera- 
tions furnish  a  partial  explanation,  viz.  the  risks  (i.  e.  the  cost)  of  trans- 
portation and,  in  the  case  of  the  special  Atlanta  rate,  the  existence  of  water' 


122  Hallway  Regulation 

In  the  case  of  non-competitive  commodities,  too,  rela- 
tive values  have  served  as  the  primary  criterion  for 
distinguishing  between  just  and  unjust  discrimination. 
Thus,  for  example,  the  Commission  held  it  unjust  and 
unreasonable  to  put  raisins  in  a  higher  class  than  dried 
fruits,  on  the  ground  that  the  market  value  of  raisins 
was  uniformly  lower  than  that  of  dried  fruits ; 13  and, 
in  like  manner,  it  ordered  celery  to  be  given  the  same 
classification  and  rates  as  were  given  to  such  vegetables 
as  cauliflower,  asparagus,  and  lettuce,  on  the  ground  that 
its  production  had  greatly  increased  and  its  market 
value  had  fallen  since  the  original  classification  was  put 
into  effect,  and  that  "it  certainly  is  no  more  a  table 
luxury  than  some  of  the  vegetables  which  have  a  lower 
class.  "14 

The  effective  prevention  of  discrimination  between 
commodities,  then,  depends  upon  the  existence  of  a  com- 
prehensive system  of  regulation,  with  adequate  rate- 
making  powers  in  the  regulating  body. 

LOCAL  DISCRIMINATION 

Any  departure  from  the  distance  principle  in  rate- 
making,  due  allowance  being  made  for  the  constant  char- 
acter of  terminal  expenses,  involves  discrimination;  any 
unreasonable  departure  from  the  distance  principle  con- 
stitutes unjust  or  unlawful  local  discrimination.  The 
principles  which  determine  the  reasonableness  of  rela- 
tive rates  have  been  discussed  in  detail  in  an  earlier 
chapter  devoted  to  a  consideration  of  the  theories  of 

competition." — M.  B.  Hammond,  Railway  Rate  Theories  of  the  Interstate 
Commerce  Commission,  29. 

13  Martin  v.  S.  P.  Co.  et  al.,  2  I.  C.  C.  Rep.  1;  2  I.  C.  E.  1. 

14  Tecumseh  Celery  Co.  v.  C.  J.  &  M.  Ey.  Co.,  et  al.,  5  I.  C.  C.  Sep.  663; 
4  I.  C.  E.  318. 


Railway  Discrimination  123 

rate-making  and  rate-making  practice.  It  appeared  that 
the  existence  of  competition  was  the  primary  factor  in 
bringing  about  a  disregard  of  distance  by  American  rail- 
ways. 

The  relation  of  rates  to  each  other  is  of  much  greater 
importance  both  to  the  shipper  and  to  the  general  pub- 
lic than  the  absolute  level  of  rates.  The  location  of  in- 
dustries and  the  prosperity  of  communities  are  directly 
dependent  upon  the  adjustment  of  railway  rates  as  be- 
tween different  commercial  centers  and  sections  of  the 
country.  Most  disputes,  therefore,  which  come  before 
our  state  and  national  commissions  involve  the  question 
of  local  discrimination.  A  just  settlement  of  these  dis- 
putes necessitates  a  proper  appreciation  of  the  signifi- 
cance and  the  complexities  of  railway  and  commercial 
competition,  of  competition  of  routes  and  competition 
of  markets.  This  task  presents  one  of  the  most  diffi- 
cult problems  in  the  whole  range  of  railway  economics 
and  goes  to  the  very  root  of  railway  regulation.  To  a 
larger  extent  even  than  in  the  case  of  discrimination 
between  commodities  or  different  classes  of  traffic,  the 
effective  elimination  of  local  discrimination  can  be  hoped 
for  only  through  a  comprehensive  system  of  regulation, 
with  large  rate-making  powers  vested  in  a  regulating 
body  composed  of  expert  and  far-sighted  men. 

THE  BASIS  AND  EXTENT  OF  LOCAL  DISCRIMINATION 

The  nature  of  this  task  will  appear  more  clearly  from 
a  consideration  of  the  motives  which  lead  to  local  dis- 
crimination and  of  the  extent  to  which  it  prevails.  These 
motives  may  best  be  presented  through  a  concrete  illus- 
tration; and  the  classical  illustration  of  the  philosophy 


124  Railway  Regulation 

of  local  discrimination  is  to  be  found  in  President  Had- 
ley's  standard  discussion.15 

On  the  coast  of  Delaware,  a  few  years  ago,  there  was  a  place 
which  we  shall  call  X,  well  suited  for  oyster-growing,  but  which 
sent  very  few  oysters  to  market,  because  the  railroad  rates  were 
so  high  as  to  leave  no  margin  of  profit.  The  local  oyster-growers 
represented  to  the  railroad  that  if  the  rates  were  brought  down 
to  one  dollar  per  hundred  pounds,  the  business  would  become 
profitable  and  the  railroad,  could  be  sure  of  regular  shipments 
at  that  price.  The  railroad  men  looked  into  the  matter.  They 
found  that  the  price  of  oysters  in  the  Philadelphia  market  was 
such  that  the  local  oystermen  could  pay  one  dollar  per  hundred 
pounds  to  the  railroad  and  still  have  a  fair  profit  left.  If  the 
road  tried  to  charge  more,  it  would  so  cut  down  the  profit  as  to 
leave  men  no  inducement  to  enter  the  business.  That  is,  those 
oysters  would  bear  a  rate  of  one  dollar  per  hundred,  and  no  more. 
Further,  the  railroad  men  found  that  if  they  could  get  every 
day  a  carload,  or  nearly  a  carload,  at  this  rate,  it  would  more 
than  cover  the  expense  of  hauling  an  extra  car  by  quick  train 
back  and  forth  every  day,  with  the  incidental  expenses  of  interest 
and  repairs.  So  they  put  the  car  on,  and  were  disappointed  to 
find  that  the  local  oyster-growers  could  only  furnish  oysters 
enough  to  fill  the  car  about  half  full.  The  expense  to  the  road 
of  running  it  half  full  was  almost  as  great  as  running  it  full; 
the  income  was  reduced  one  half.  They  could  not  make  up  by 
raising  the  rates,  for  these  were  as  high  as  the  traffic  would  bear. 
They  could  not  increase  their  business  much  by  lowering  rates. 
The  difficulty  was  not  with  the  price  charged,  but  with  the 
capacity  of  the  local  business.  It  seemed  as  if  this  special  service 
must  be  abandoned. 

One  possibility  suggested  itself.  At  some  distance  beyond  X, 
the  terminus  of  this  railroad,  was  another  oyster-growing  place, 
Y,  which  sent  its  oysters  to  market  by  another  route.  The  supply 
at  Y  was  very  much  greater  than  at  X.  The  people  at  Y  were 

15  A.  T.  Hadley,  Railroad  Transportation,  116-117. 


Railway  Discrimination  125 

paying  a  dollar  a  hundred  to  send  their  oysters  to  market.  It 
would  hardly  cost  twenty-five  cents  to  send  them  from  Y  to  X. 
If,  then,  the  railroad  from  X  to  Philadelphia  charged  but  seventy- 
five  cents  a  hundred  on  oysters  which  came  from  Y,  it  could 
easily  fill  its  car  full.  This  was  what  they  did.  They  then  had 
half  a  carload  of  oysters  grown  at  X,  on  which  they  charged  a 
dollar,  and  half  a  carload  from  Y,  on  which  they  charged  seventy- 
five  cents  for  exactly  the  same  service. 

Of  course  there  was  a  grand  outcry  at  X.  Their  trade  was 
discriminated  against  in  the  worst  possible  way — so  they  said — 
and  they  complained  to  the  railroad.  But  the  railroad  men  fell 
back  on  the  logic  of  facts.  The  points  were  as  follows:  1.  A 
whole  carload  at  seventy-five  cents  would  not  pay  expenses  of 
handling  and  moving.  2.  At  higher  rates  than  seventy-five 
cents  they  could  not  get  a  whole  carload,  but  only  half  a  carload ; 
and  half  a  carload  at  a  dollar  rate  (the  highest  charge  the  article 
would  bear)  would  not  pay  expenses.  Therefore,  3.  On  any 
uniform  rate  for  everybody  the  road  must  lose  money,  and,  4. 
They  would  either  be  compelled  to  take  the  oyster  car  away 
altogether,  or  else  get  what  they  could  at  a  dollar,  and  fill  up 
at  seventy-five  cents.  There  was  no  escape  from  this  reasoning ; 
and  the  oystermen  of  X  chose  to  pay  the  higher  rate  rather  than 
lose  the  service  altogether. 

President  Hadley's  discussion  indicates  the  nature  of 
the  justification  which  may  be  offered  for  local  discrim- 
ination. In  essence  it  consists  of  the  fact  that  it  may 
be  advantageous,  rather  than  prejudicial,  for  the  locality 
apparently  discriminated  against  to  have  a  lower  rate 
allowed  to  the  more  distant  point  because  of  the  exist- 
ence at  that  point  of  railway  or  market  competition. 
The  contribution  to  fixed  charges  or  constant  expendi- 
tures which  may  be  derived  from  the  seemingly  favored 
traffic  diminishes  rather  than  increases  the  burden  to 
be  borne  by  the  local  non-competitive  traffic. 

There  is,  however,  a  real  danger  to  be  guarded  against. 


126  Railway  Regulation 

Distance  should  be  disregarded  in  the  adjustment  of 
rates  only  if  the  given  traffic  cannot  be  secured  without 
the  disregard  of  distance.  Moreover,  only  such  traffic 
as, is  reasonably  tributary  to  a  given  road  should  be 
striven  for  through  the  instrumentality  of  rate  adjust- 
ment. Otherwise  serious  economic  waste  would  be  the 
natural  result,  the  gains  of  a  particular  railway  being 
obtained  at  the  expense  of  the  community's  welfare. 
The  sole  limitation  upon  roundabout  or  circuitous  rout- 
ing would  be  the  extra  or  out-of-pocket  cost  of  rendering 
the  specific  service.  Furthermore,  the  discrimination, 
even  when  legitimate,  must  be  reasonable.  The  rate  at 
the  more  distant  point  must  not  be  excessively  low;  the 
rate  at  the  nearer  point  must  not  be  excessively  high. 
These  problems  can  be  solved  successfully  only  by  means 
of  effective  regulating  machinery,  so  employed  as  to 
render  full  justice  to  the  railways  as  well  as  afford 
adequate  protection  to  the  public. 

In  the  trunk-line  rate  system,  which  controls  the  large 
traffic  between  the  Atlantic  seaboard  and  the  middle 
west,  a  distance  tariff  largely  prevails  and  there  is  a 
conspicuous  freedom  from  local  discrimination.  In  the 
southern  basing-point  system  and  in  the  transcontinental 
rate  structure,  the  distance  principle  is  generally  disre- 
garded and  local  discrimination  is  the  most  frequent  and 
the  most  fundamental  grievance  in  rate  disputes.  Even 
here,  however,  it  is  to  be  noted  that  the  rate  adjust- 
ments are  the  result  of  long  historical  development  and, 
in  large  measure,  of  natural  geographical  conditions. 
Changes  must  be  introduced  slowly  and  cautiously.  Only 
through  the  combined  wisdom,  honesty,  and  restraint  of 
the  railways  and  our  public  servants,  state  and  national, 
can  permanent  improvement  in  the  situation  be  assured 
without  consequent  impairment  of  well-established  in- 


Railway  Discrimination  127 

dustrial  conditions.  The  success  with  which  rates  are 
adjusted  with  reference  to  each  other  in  the  future  will 
constitute  the  supreme  test  of  our  American  system  of 
railway  regulation.16 

PERSONAL   DISCRIMINATION 

In  the  case  of  personal  discrimination,  few  if  any  of 
the  economic  justifications  may  be  urged  which  underlie 
local  discrimination  and  discrimination  between  com- 
modities. The  complexities  of  railway-rate  adjustments 
present  genuine  and  sometimes  insurmountable  difficul- 
ties in  distinguishing  between  reasonable  and  unreason- 
able preferences  for  particular  places  or  categories  of 
traffic.  But  practically  all  discriminations  between  per- 
sons are  unjust.  They  are  especially  objectionable  be- 
cause they  have  been  used  to  build  up  unlawful  monopo- 
lies in  the  industrial  field  and  because  they  run  counter 
to  the  American  spirit  of  fair  play.  Moreover,  in  the 
present  state  of  our  law,  they  are  granted  and  secured 
through  secret  means;  and  the  expedients  resorted  to, 
in  their  modern  forms,  are  so  subtle  and  indirect  as  to 
make  detection  difficult  and  expensive,  if  not  impossible. 

Discrimination  between  persons  may  appear  both  in 
the  passenger  and  in  the  freight  service  of  the  railways. 
In  the  passenger  traffic  relatively  little  difficulty  has 
arisen,  especially  in  recent  years.  Formerly  the  liberal 
dispensation  of  free  passes  to  legislators,  judges,  and 
other  public  officers  was  an  evil  of  great  magnitude  and 
importance,  but  drastic  legislation  by  the  states  and  the 
federal  government  has  apparently  proved  entirely 

16  Limitation  of  space  precludes  an  analysis  here  of  specific  cases  in- 
volving local  discrimination.  An  excellent  discussion  of  the  problem,  with 
a  wealth  of  concrete  detail,  will  be  found  in  Ripley,  Railroads:  Rates  and 
Regulation,  chap.  VII. 


128  Railway  Regulation 

effective  in  abolishing  this  method  of  corruption.17  The 
free-pass  evil  is  now  looked  upon  as  a  thing  of  the  past, 
and  rebates  in  passenger  rates,  though  occasionally 
paid  contrary  to  law,  are  exceedingly  rare. 

In  connection  with  the  freight  traffic  numerous  forms 
of  personal  discrimination  are  to  be  found.  The  original 
practice,  as  already  indicated,  was  to  carry  goods  for 
the  favored  shipper  free  or  at  reduced  rates;  but  this 
crude  method  has  long  ago  been  replaced  by  the  practice 
of  nominally  charging  the  shipper  the  regular  or 
published  rate  and  effecting  the  discrimination  through 
one  expedient  or  another. 

False  billing,  for  example,  was,  and  still  is  to  no 
small  extent,  a  favorite  device.  The  shipper  is  charged 
the  full  rate  for  the  shipment  as  described  in  the  bill  of 
lading;  but  this  description  may  be  intentionally  false. 
A  short  weight  may  be  stated;  or  a  smaller  number  of 
packages  may  be  named  than  are  actually  contained  in 
the  consignment;  or  the  goods  may  be  wrongly  classi- 
fied— often  referred  to  as  under-classification — so  as  to 
receive  the  benefit  of  a  lower  rate ;  or  they  may  be  billed 
as  for  export,  when  in  fact  they  are  intended  for  domestic 
consumption;  or  they  may  be  billed  as  imported  goods, 
when  in  fact  they  have  been  produced  in  this  country; 
or  they  may  be  consigned  as  a  through  shipment,  when 
in  fact  they  are  destined  for  a  local  non-competitive 
point.  Somewhat  allied  to  the  practice  of  false  billing 
(which  is  often  resorted  to  without  the  knowledge  or 
consent  of  the  railway),  is  the  device  employed  by  traf- 
fic managers  of  charging  some  shippers  according  to  the 
net,  and  others  according  to  the  gross,  weight  of  their 

17  In  a  majority  of  these  cases  the  carriers  welcomed  the  legislation 
because  it  relieved  them  of  the  expense  involved  in  carrying  free  a  great 
number  of  persons. 


Railway  Discrimination  129 

shipments,  and  the  expedient  of  quoting  different  rates 
for  the  same  commodity  packed  in  slightly  different 
ways.  Thus,  for  example,  the  Standard  Oil  Company, 
shipping  in  tank  cars,  was  charged  at  one  time  only  for 
the  oil,  while  its  competitors,  shipping  in  barrels,  were 
charged  for  transportation  of  both  the  oil  and  the  barrels. 
This  discrimination  appeared  all  the  more  unjust  because 
the  Standard  Oil  Company's  competitors  were  compelled 
to  ship  their  oil  in  barrels,  since  there  was  an  agreement 
between  the  Standard  Oil  Company  and  certain  railways 
whereby  the  railways  refused  to  supply  tank  cars  to  these 
competitors. 

By  far  the  most  common  expedient  for  effectually 
granting  preferential  rates  to  favored  shippers  is  the 
much-condemned  practice  of  rebating.  A  rebate  in  its 
original  form  consisted  in  the  repayment  to  the  shipper 
of  part  of  the  rate  paid  by  him.  Here,  however,  as  in 
other  cases,  the  general  tendency  has  been  to  conceal  the 
process  as  much  as  possible.  Few  railway  rebates  are 
now  granted  in  this  bare  form;  they  are  usually  so  dis- 
guised as  to  prevent  easy  detection.  A  few  illustrations 
may  be  given  of  this  modern  form  of  rebating. 

The  payment  of  rentals  for  the  use  of  private  cars 
offers  one  class  of  opportunities  for  rebating.  A  shipper 
who  uses  his  own  car  is  charged  the  full  rate  for  the 
transportation  of  his  freight  and  is  allowed  a  daily  rental 
for  his  car  as  long  as  it  is  being  used  by  the  railway.  If 
the  rental  chances  to  be  a  high  one — beyond  the  actual 
value  of  the  use  of  the  car — a  rebate  is  in  effect  given  to 
the  shipper.  This  form  of  abuse  has  been  amazingly 
common,  such  large  rentals  being  paid  that  in  some  cases 
they  have  amounted  in  the  short  period  of  two  years  to 
a  sum  sufficient  to  pay  the  original  cost  of  the  car,  interest 
on  the  investment,  and  the  expense  of  maintenance. 


130  Railway  Regulation 

Eebating  is  accomplished  also  through  the  expedient 
of  the  industrial  line.  If  it  is  desired  to  give  concessions 
to  a  shipper  whose  plant  is  located  slightly  off  the  line 
of  the  railway  yet  connected  with  it  by  a  short  spur  or 
side-track,  the  shipper  organizes  a  special  corporation  as 
a  railway  company  to  own  and  operate  the  spur.  Thence- 
forth a  shipment  from  the  factory  or  plant  nominally 
passes  over  the  lines  of  two  companies — the  newly 
organized  line  and  the  regular  railway.  Accordingly, 
when  the  charge  for  transportation  is  collected,  it 
becomes  necessary  for  the  two  companies  to  divide  it 
between  them,  and  the  method  of  apportionment  is  usually 
such  as  to  give  the  industrial  line  much  more  than  its  due 
share  of  the  whole.  The  full  rate,  then,  appears  to  be 
collected,  but  a  rebate  is  allowed  under  the  guise  of  a 
payment  to  the  industrial  line.  Similar  in  character  to 
this  form  of  discrimination  through  the  instrumentality 
of  industrial  lines  is  the  device  whereby  a  railway 
sometimes  permits  a  favored  shipper  to  perform  some 
service,  such  as  loading,  in  connection  with  the  carriage 
of  his  goods,  and  thereupon  allows  as  compensation  for 
his  labor  a  sum  entirely  out  of  proportion  to  the  value 
of  his  service. 

Even  more  pernicious  than  these  forms  of  discrimina- 
tion and  less  easy  to  discover  are  the  rebates  effected 
through  the  machinery  of  the  claim  department.  A 
shipper  is  charged  the  published  rate ;  but  as  soon  as  the 
carriage  of  his  freight  is  completed,  he  files  a  false  claim 
for  fictitious  injury  to  or  loss  of  his  goods,  or  an  ex- 
cessive claim  for  actual  injury  or  loss.  In  accordance 
with  a  tacit  agreement  between  the  railway  and  the 
shipper,  these  claims  are  promptly  paid.  This  practice 
clearly  results  in  offensive  rebating,  though  the  payments 


Railway  Discrimination  131 

appear  on  the  books  of  the  railway  company  as  legitimate 
items  of  expense. 

The  practices  described  in  the  preceding  paragraphs, 
resulting  for  the  most  part  in  preferential  rates,  are 
perhaps  the  most  serious  forms  of  personal  discrimina- 
tion, but  there  are  many  preferences  in  the  service 
rendered  to  different  shippers,  which  likewise  merit 
unquestioned  condemnation. 

A  source  of  perennial  complaint  is  found  in  the  conduct 
of  railways  in  the  distribution  of  their  cars.  It  is  their 
acknowledged  duty  to  supply  all  shippers  with  as  many 
cars  as  they  require,  so  far  as  their  facilities  will  allow. 
If  the  supply  of  cars  is  inadequate,  it  is  the  duty  of  the 
railways  to  distribute  them  fairly  among  the  several  ship- 
pers in  reasonable  proportion  to  their  respective  needs. 
In  practice,  however,  it  is  found  that  the  railways  not 
infrequently  discriminate  extensively  in  the  distribution 
of  cars.  The  big  shipper  can  often  secure  all  the  cars  he 
needs  when  the  little  shipper  clamors  for  them  in  vain. 
In  the  matter  of  speedy  transportation  and  prompt  deliv- 
ery similar  distinctions  are  often  made. 

Certain  special  privileges  are  also  granted  to  the 
favored  shipper  which  are  ordinarily  denied  by  the  rail- 
ways. The  right  of  milling  in  transit  is  an  excellent 
example  of  such  special  privileges.  If  wheat  is  to  be 
shipped  from  one  point  to  a  second,  there  to  be  converted 
into  flour,  and  subsequently  to  be  sent  on  to  a  third  point, 
some  shippers  and  millers  are  required  to  pay  the  local 
rate  on  wheat  between  the  first  two  points  and  the  local 
rate  on  flour  between  the  second  and  third,  while  for  the 
specially  favored  persons  the  two  shipments  are  treated 
substantially  as  one,  with  the  privilege  of  milling  in 
transit,  at  a  rate  but  slightly  higher  than  the  through 
rate  on  wheat.  These  favored  individuals  are  thereby 


132  Railway  Regulation 

given  a  decided  advantage  over  those  to  whom  the  privi- 
lege is  denied.  A  similar  privilege  is  occasionally  enjoyed 
by  a  shipper  who  consigns  a  car  of  freight  at  the  carload 
rate,  but  is  allowed  to  unload  part  of  the  goods  at  various 
points,  while  his  competitors,  if  they  desire  to  be  granted 
the  same  privilege,  are  compelled  to  pay  the  less-than- 
carload  rate  on  each  separate  consignment  in  the  car. 

The  great  variety  of  discriminatory  practices  and  the 
subtlety  and  refinement  of  their  forms  are  equally 
impressive.  It  is  doubtless  true,  however,  that  the  extent 
of  these  discriminatory  practices  has  very  markedly 
declined  in  recent  years.  In  part  this  result  has  come 
through  the  voluntary  recognition  by  the  railways  of  the 
injurious  effects  of  discrimination,  to  themselves  as  well 
as  to  the  public;  but  in  the  main  the  notable  decrease  in 
the  amount  of  discrimination  has  been  secured  through 
the  enactment  and  enforcement  of  stringent  legislation. 
It  is  necessary,  here,  to  examine  briefly  the  character  and 
development  of  this  legislation. 

THE  LAW  AGAINST  DISCRIMINATION 
GENERAL  PROHIBITIONS 

From  the  beginnings  of  regulation,  discriminatory 
practices  have  been  declared  unlawful  in  both  state  and 
federal  legislation.  The  chief  grievance  at  the  time  of 
the  Granger  movement  was  the  extortionate  character  of 
railway  rates,  but  the  prohibition  of  discrimination  was 
an  essential  part  of  the  state  legislation  to  which  the 
movement  led.  And  since  the  most  important  immediate 
factor  in  the  enactment  of  the  Act  to  Regulate  Commerce 
in  1887  was  the  wide  prevalence  of  discriminatory  prac- 
tices, the  prohibitions  against  discrimination  were  the 
cardinal  features  of  the  statute  as  originally  passed. 


Railway  Discrimination  133 

In  the  Act  to  Regulate  Commerce  an  attempt  is  made 
to  prevent  discrimination  in  any  form.  It  is  provided 
that  if  any  common  carrier  shall,  directly  or  indirectly, 
by  any  special  rate,  rebate,  drawback,  or  other  device, 
charge,  demand,  collect,  or  receive  from  any  person  or 
persons  a  greater  or  less  compensation  for  any  service 
rendered,  or  to  be  rendered,  in  the  transportation  of 
passengers  or  property,  than  it  charges,  demands,  col- 
lects, or  receives  from  any  other  person  or  persons  for 
doing  for  him  or  them  a  like  and  contemporaneous  service 
in  the  transportation  of  a  like  kind  of  traffic  under  sub- 
stantially similar  circumstances  and  conditions,  such 
common  carrier  shall  be  deemed  guilty  of  unjust  dis- 
crimination, which  is  prohibited  and  declared  to  be 
unlawful.18  Furthermore,  discrimination  between  goods 
and  between  places  as  well  as  personal  discrimination  is 
prohibited  in  general  terms.  It  is  declared  to  be  unlawful 
for  any  common  carrier  to  make  or  give  any  undue  or 
unreasonable  preference  or  advantage  to  any  particular 
person,  company,  firm,  corporation,  or  locality,  or  any 
particular  description  of  traffic,  in  any  respect  whatso- 
ever, or  to  subject  any  particular  person,  company,  firm, 
corporation,  or  locality,  or  any  particular  description  of 
traffic,  to  any  undue  or  unreasonable  prejudice  or  disad- 
vantage in  any  respect  whatsoever.19 

One  of  the  important  purposes  for  which  the  Interstate 
Commerce  Commission  was  created  was  to  provide 
administrative  machinery  for  the  enforcement  of  these 
provisions.  Heavy  fines,  as  well  as  imprisonment,20  are 


is  Act  to  Regulate  Commerce,  as  amended,  sec.  2. 

19  Ibid.,  sec.  3. 

20  The  penalty  of  imprisonment  was  established  in  1889 ;  it  was  removed 
by  the  Elkins  Act  of  1903 ;  and  it  was  re-established  by  the  Hepburn  Act  of 
1906. 


134  Railway  Regulation 

imposed  for  violations  of  these  prohibitions  against  dis- 
criminatory practices.  Shippers  accepting  rebates  as  well 
as  railways  granting  them  are  guilty  of  unlawful  conduct ; 
and  both  the  railway  corporation  and  its  officers  and 
agents  are  subject  to  the  penalties  for  violation  of  the 
provisions  against  discrimination.21  Moreover,  the  pro- 
visions of  the  Act  enjoining  upon  the  carriers  due  pub- 
licity in  rate-making  and  granting  to  the  Commission 
general  powers  of  investigation  and  supervisory  author- 
ity over  accounting  practices  were  enacted  and  are  util- 
ized by  the  Interstate  Commerce  Commission,  to  a  very 
large  extent,  as  a  means  of  enforcing  more  effectively  the 
provisions  against  discrimination. 

THE  LONG-AND-SHORT-HATJL  CLAUSE 

One  special  form  of  local  discrimination  is  specifically 
prohibited  in  most  state  laws  and  constitutes  an  im- 
portant feature  of  the  Act  to  Eegulate  Commerce.  The 
famous  fourth  section  of  the  Act,  as  enacted  in  1887, 
declared  it  to  be  unlawful  for  the  railways  "to  charge  or 
receive  any  greater  compensation  in  the  aggregate  for 
the  transportation  of  passengers  or  of  like  kind  of  prop- 
erty, under  substantially  similar  circumstances  and  con- 
ditions, for  a  shorter  than  for  a  longer  distance  over 
the  same  line,  in  the  same  direction,  the  shorter  being 
included  within  the  longer  distance. "  From  the  very 
beginning22  the  Commission  interpreted  this  clause  as 
justifying  a  departure  from  the  long-and-short-haul 
principle  only  when  water  competition  or  competition 
between  railways  not  subject  to  the  Act  existed  at  the 

21  Elkins  Act,  sec.  1. 

22  Louisville  and  Nashville  Case,  1  I.  C.  C.  Eep.  3L 


Railway  Discrimination  135 

more  distant  point.23  In  other  words,  the  mere  existence 
of  railway  competition  at  the  more  distant  point  did  not, 
in  the  opinion  of  the  Commission,  constitute  such  dis- 
similarity of  circumstances  and  conditions  as  to  remove 
a  given  case  from  the  prohibition  of  the  fourth  section. 
This  interpretation  was  uniformly  applied  for  a  period 
of  ten  years,  but  it  was  concurred  in  by  the  railways  only 
under  vigorous  protest. 

ITS   NULLIFICATION 

In  1897  the  Supreme  Court  of  the  United  States,  by  its 
decision  in  the  Alabama  Midland  Case,24  overruled  the 
Commission's  interpretation  of  the  fourth  section  and 
effectually  nullified  the  application  of  the  long-and- 
short-haul  principle  in  the  adjustment  of  railway  rates. 

The  case  was  first  decided  by  the  Interstate  Commerce 
Commission  in  1893.  The  facts,  briefly,  were  as  follows : 
Troy,  Alabama,  is  situated  52  miles  east  of  Montgomery, 
on  the  Alabama  Midland  Railroad.  The  rates  on  the 
Alabama  Midland  Railroad  from  all  points  in  the  east 
and  northeast  were  higher  to  Troy  than  to  Montgomery, 
although  traffic  passed  through  Troy  on  its  way  to  Mont- 
gomery, and  the  rates  from  Troy  to  eastern  points  were 
higher  than  the  rates  from  Montgomery,  although  traffic 
from  Montgomery  passed  through  Troy  on  its  way  to  the 
eastern  seaports.  The  carrier  justified  the  lower  rates 
at  Montgomery  because  of  the  existence  at  that  point 
of  several  lines  of  railway  competing  for  all  kinds  of  traffic. 
Railway  competition  at  Montgomery,  largely  absent  at 
Troy,  constituted  such  a  dissimilarity  of  circumstances 

23  Certain  ' '  rare  and  peculiar ' '  cases  were  also  excepted  by  the  Com- 
mission.    Compare  the  First  Annual  Eeport  of  the  Interstate  Commerce 
Commission. 

24  Interstate  Commerce  Commission  v.  A.  3M.  By.  Co.  et  aL,  168  U.  8.  144. 


136  Railway  Regulation 

and  conditions  at  Montgomery  and  at  Troy,  it  was  urged, 
as  to  justify  a  departure  from  the  prohibition  of  the 
long-and-short-haul  clause.  The  Commission,  in  accord- 
ance with  its  previous  decisions,  refused  to  recognize 
that  the  existence  of  competition  between  railways  sub- 
ject to  the  Act  to  Regulate  Commerce  created  the  neces- 
sary dissimilarity  of  circumstances  and  conditions.  The 
Supreme  Court  set  aside  the  ruling  of  the  Commission 
and  held  that  the  higher  rate  at  Troy  did  not  constitute 
a  violation  of  the  fourth  section. 

The  interpretation  of  the  Supreme  Court  amounted  to 
a  repeal  or  nullification  of  the  long-and-short-haul  prin- 
ciple because  it  authorized  the  railways,  without  special 
consent  of  the  Commission,  to  charge  a  higher  rate  for 
the  shorter  than  for  the  longer  distance  in  practically 
all  cases  in  which  the  practice  would  be  of  any  benefit 
from  the  standpoint  of  the  railways,  regardless  of  the 
public  welfare.  The  Interstate  Commerce  Commission, 
in  its  annual  report  for  1897,  distinguished  clearly  be- 
tween its  own  view  and  the  view  of  the  court.  In  criti- 
cism of  the  Alabama  Midland  decision,  the  Commission 
said: 

The  most  superficial  examination  of  the  questions  involved 
showed  that  as  a  matter  of  fact  there  was  a  broad  difference 
between  different  kinds  of  competition  as  related  to  this  question. 
The  water  carrier  did  not  stand  like  the  carrier  by  rail.  The 
highway  over  which  he  operated  cost  him  nothing.  His  vessels 
were  comparatively  inexpensive  and  could  readily  be  transferred 
from  place  to  place.  The  cost  of  carriage  was  ordinarily  much 
less.  Above  all,  he  was  not  subject  to  the  provisions  of  this  Act. 
He  was  compelled  to  publish  no  rate,  to  respect  no  schedule ;  he 
was  free  to  go  into  the  market  and  to  take  whatever  transporta- 
tion he  could  obtain  at  whatever  figure  he  chose.  Manifestly 
there  was  no  similarity  between  competition  with  this  carrier 


Railway  Discrimination  137 

and  competition  with  a  railway  subject  to  the  provisions  of  the 
Act  to  Regulate  Commerce.  The  same  thing  was  true  to  a 
limited  extent  with  railroads  in  foreign  countries.  The  Canadian 
Pacific  Railway  could  make  any  rate  it  chose  from  the  Atlantic 
to  the  Pacific,  could  vary  that  rate  at  pleasure,  and  could  fix  its 
terminal  rate  without  any  reference  to  intermediate  points.  So 
also  could  a  railroad  situated  wholly  within  a  state,  as  to  the 
traffic  within  that  state. 

ITS  REHABILITATION 

Between  1897  and  1910  the  railways  were  virtually 
free  to  disregard  the  long-and-short-haul  principle  at 
will.  The  Commission  was  without  adequate  authority 
to  enforce  the  fourth  section  of  the  Act.  The  agitation 
for  the  amendment  of  the  long-and-short-haul  clause, 
which  began  to  take  shape  immediately  after  the  Ala- 
bama Midland  decision  was  rendered,  finally  bore  fruit 
in  the  Mann-Elkins  Act  of  1910.  One  of  the  most  im- 
portant features  of  that  legislation  was  the  rehabilitation 
of  the  fourth  section.  The  phrase  "under  substantially 
similar  circumstances  and  conditions"  was  entirely 
stricken  from  the  section.  As  a  result,  the  railways  are 
now  forbidden  to  charge  a  higher  rate  for  the  shorter 
than  for  the  longer  haul  under  any  conditions,  without 
the  prior  consent  of  the  Commission.  Under  this  reha- 
bilitated long-and-short-haul  clause  the  Commission  is 
engaged  in  effecting  a  readjustment  of  the  southern  and 
transcontinental  rate  structures  in  which  disputes  as  to 
local  discrimination  have  most  frequently  arisen. 

POOLING  AND.  DISCRIMINATION 

In  conclusion  it  is  necessary  to  recognize  that  the  law 
against  discrimination  would  gain  in  effectiveness 
through  the  repeal  of  the  anti-pooling  section  of  the  Act 


138  Railway  Regulation 

to  Kegulate  Commerce.  The  policy  of  prohibiting  pool- 
ing absolutely,  even  with  the  consent  or  under  the  super- 
vision of  the  Commission,  is  inconsistent  with  and  runs 
counter  to  the  policy  of  eliminating  discriminatory  prac- 
tices. Preferential  treatment  of  favored  shippers  arises 
primarily  through  the  exigencies  of  keen  competition. 
The  most  effective  check  upon  personal  discrimination 
lies  in  the  legal  recognition  of  co-operative  effort.  With 
the  large  powers  of  regulation  now  vested  in  the  Inter- 
state Commerce  Commission  and  in  most  of  the  state 
commissions,  the  legalization  of  pooling,  under  govern- 
ment control,  would  involve  little  danger  of  abuse  and 
great  possibilities  of  relief  alike  to  the  railways  and  to 
the  public.  The  demand  for  the  repeal  of  section  five 
of  the  Act  is  both  general  and  insistent.  Only  the  deep- 
seated  distrust  of  monopoly  and  of  all  arrangements  that 
may  lead  to  monopoly  which  is  characteristic  of  the 
American  mind  stands  in  the  way  of  translating  this 
demand  into  legislative  action. 

TEST  QUESTIONS 

1.  What  is  the  fundamental  cause  of  railway  discrimination? 

2.  What  is  the  distinction  between  just  and  unjust  discrim- 
ination ? 

3.  Discuss  briefly  discrimination  between  commodities. 

4.  Why  is  the  problem  of  local  discrimination  so  difficult  of 
solution  in  many  cases? 

5.  Why  is  personal  discrimination  generally  without  justifi- 
cation ? 

6.  Mention  some   of   the   more   common   forms   of   personal 
discr  imin  ation . 

7.  What  provisions  against  discrimination  are  made  in  the  Act 
to  Regulate  Commerce  ? 

8.  Trace  briefly  the  development  of  the  long-and-short-haul 
clause. 

9.  Why  would  a  repeal  of  the  anti-pooling  section  of  the  Act 
tend  to  eliminate  discrimination? 


CHAPTER  VIH 

REGULATION  BY  THE   STATES  1 

Modern  railway  regulation  by  the  states  is  carried  on 
primarily  through  administrative  commissions,  which 
commissions  are  usually  vested  with  authority  to  regu- 
late also  public  utilities  other  than  railways.  This 
chapter  is  devoted  to  a  consideration  of  the  nature  and 
activities  of  these  commissions.  The  following  pages, 
therefore,  include  a  discussion  of  public  service  and  public 
utility  commissions  as  well  as  railroad  commissions,  and 
of  gas,  electric,  water,  telephone,  and  telegraph  com- 
panies as  well  as  railroad  companies.  The  principles  of 
regulation  are  substantially  alike  for  all  these  public 
utilities,  and  the  authority  to  regulate  all  or  a  number  of 
them  is  usually  vested  in  the  same  commission,  whether 
it  be  called  a  railroad,  public  service,  or  public  utility 
commission. 

THE  METHODS  OF  STATE  REGULATION 
UNREGULATED  MONOPOLY 

In  the  early  days  of  the  development  of  public  utility 
properties  there  was  little  or  no  regulation  for  the  safe- 
guarding of  public  welfare.  In  order  to  afford  effective 

1  The  substance  of  this  chapter  appeared  under  the  title  ' '  Commission 
Regulation  of  Public  Utilities :  A  Survey  of  Legislation, ' '  in  the  Annals  of 
the  American  Academy  of  Political  and  Social  Science  for  May,  1914,  and 
is  here  reprinted  by  permission. 

139 


140  Railway  Regulation 

stimulus  for  inventive  genius  and  business  initiative,  it 
was  necessary  to  provide  a  free  field  for  private  enter- 
prise, unhampered  by  legislative  restriction.  The 
technique  of  railway  and  utility  operation,  in  which  so 
high  a  degree  of  efficiency  has  since  been  attained,  had 
yet  to  be  worked  out.  The  permanent  necessity  and  finan- 
cial practicability  of  these  utility  services,  which  have 
now  been  recognized  beyond  recall,  had  yet  to  be 
established. 

In  these  monopolistic  industries,  as  in  private  business, 
public  welfare  counseled  a  policy  of  non-interference.  In 
spite  of  their  monopolistic  character,  it  was  felt  that  the 
public  service  industries,  in  order  to  be  ready  for  public 
control  no  less  than  for  public  ownership,  must  first  have 
reached  a  stage  of  maturity  consistent  with  the  lessened 
opportunities  for  private  gain  necessarily  involved  in  a 
system  of  effective  public  regulation.  During  the  first 
half  of  the  nineteenth  century,  therefore,  franchise  priv- 
ileges were  freely  granted  by  the  state  legislatures. 
These  franchises  extended  for  long  periods  and  often  in 
perpetuity.  As  a  result,  the  privileges  essential  for  sup- 
plying the  future,  as  well  as  the  then-existing  needs  of 
the  community  were  given  to  private  corporations  with 
little  thought  of  immediate  restriction,  or  of  reservation 
of  power  'for  future  regulation.  The  public  service  fran- 
chise was  looked  upon  as  a  private  contract  between  the 
state  and  the  grantee  corporation  instead  of  as  a  permit 
by  the  sovereign  for  the  performance  by  private  indi- 
viduals or  corporations  of  functions  largely  public  in 
their  nature. 

The  regulation  of  public  utilities  may  be  said  to  have 
passed  through  three  stages,  not  always  entirely  distinct, 


Regulation  by  the  States  141 

from  which  emerge  three  different  methods  of  public 
control : 

1.  Kegulation  through  franchise  provisions. 

2.  Legislative  regulation. 

3.  Commission  regulation. 

REGULATION    THROUGH    FRANCHISE    PROVISIONS 

Eegulation  through  the  provisions  of  the  franchise 
began  during  the  second  half  of  the  nineteenth  century 
when  greater  care  came  to  be  exercised  in  the  drawing  up 
and  the  granting  of  franchises.  Exclusive  grants  were 
often  prohibited  by  constitutional  provision  and  statutory 
enactment.  The  unconditional  long-term  grant  began  to 
give  way  to  the  short-term  franchise  with  restrictive  pro- 
visions. Instead  of  grants  in  perpetuity  or  for  ninety- 
nine,  or  even  fifty,  years,  the  life  of  the  franchise  came 
more  generally  to  be  from  twenty-five  to  forty  years. 
Moreover,  the  grantee  was  subjected  to  restrictions 
incorporated  in  the  franchise.  Maximum  charges  were 
often  prescribed,  particularly  in  the  case  of  railroad  and 
street-railway  service,  above  which  the  grantee  corpora- 
tions could  not  go  in  fixing  their  rates  and  fares.  There 
was  often  some  provision,  too,  as  to  the  character  of  the 
service  to  which  the  public  would  be  entitled  under  the 
terms  of  the  franchise. 

This  form  of  regulation  had  two  fundamental  draw- 
backs :  in  view  of  the  rapid  growth  of  the  community,  the 
restrictions  contained  in  the  grant  did  not  provide  ade- 
quate regulation  even  for  the  short  period  of  the 
franchise;  and  there  was  no  administrative  machinery 
for  the  execution,  on  behalf  of  the  public,  of  the  limited 
restrictions  of  the  franchise  contract. 


142  Railway  Regulation 

LEGISLATIVE    REGULATION 

The  second  form  in  which  the  movement  for  adequate 
regulation  manifested  itself  was  the  reservation  to  the 
state  of  the  general  power  of  control.  This  reserved 
power  of  regulation,  which  was  gradually  extended  by 
the  courts  as  a  power  inherent  in  the  state  even  in  the 
absence  of  express  reservation,  was  exercised  by  state 
legislatures  through  the  enactment  of  statutes,  and  by 
city  councils  through  the  promulgation  of  municipal 
ordinances. 

This  method  gave  a  fuller  recognition  to  the  perma- 
nence of  the  problems  raised  by  the  unregulated  operation 
of  the  public  service  industries.  It  afforded  a  means  for 
regular  instead  of  periodic  adjustment  of  the  relations 
between  the  public  and  the  public  service  corporations. 
It  was  defective,  however,  in  several  particulars.  The 
lack  of  expert  knowledge  on  the  part  of  legislators  and 
councilmen,  together  with  the  great  diversity  of  their 
interests,  often  resulted  in  ill-advised  or  ineffective  legis- 
lation. Moreover,  the  absence  of  permanent  adminis- 
trative machinery  for  carrying  into  effect  the  public 
policy  embodied  in  the  legislation  aiming  to  regu- 
late railroads  and  other  public  utilities,  resulted  in  a 
control  which  was  inevitably  spasmodic  and,  at  best, 
inadequate.  This  was  the  general  situation  toward  the 
end  of  the  nineteenth  century.2 

COMMISSION  REGULATION 

Eegulation  by  the  states  through  administrative  com- 
missions of  the  type  that  prevails  today  is  very  recent. 
The  Railroad  Commission  of  Wisconsin  was  not  estab- 

2  Even  after  commissions  began  to  be  used  in  place  of  direct  legislative 
control  the  commissions  for  a  long  time  were  given  little  real  power. 


Regulation  by  the  States  143 

lished  until  1905,  and  it  was  not  given  jurisdiction  over 
utilities  other  than  railroads,  express  companies,  and 
telegraph  companies  till  1907.  The  Public  Service  Com- 
missions of  New  York  were  not  established  till  1907.  The 
Wisconsin  and  New  York  commissions  have  served,  to 
a  large  degree,  as  models  for  the  numerous  administra- 
tive bodies  for  the  state  regulation  of  railroads  and  other 
public  utilities  that  have  sprung  into  being  since  1907; 
and  the  Wisconsin  and  New  York  laws  have  been  the 
basis  of  a  large  part  of  the  public  utility  legislation 
recently  enacted. 

These  laws  substitute  administrative  regulation  for 
direct  legislative  control.  To  special  boards  or  commis- 
sions are  entrusted  large  powers  whereby  they  are,  en- 
abled to  keep  themselves  constantly  and  thoroughly 
informed  of  the  practical  operation  as  well  as  of  the 
general  policy  of  public  service  corporations.  On  the 
basis  of  this  knowledge  and  information  they  exercise 
such  supervision  over  these  utilities  as  may  tend  to  har- 
monize the  private  interests  of  the  owners  and  the  general 
welfare  of  the  public.  With  but  few  exceptions,  present- 
day  regulation  is  legislative  in  character  only  in  the  sense 
that  the  extent  of  commission  jurisdiction  and  power  is 
determined  by  statutory  enactment. 

THE  SCOPE  OF  EAILKOAD  AND  UTILITY  LEGISLATION 

Now  a  complete  summary  of  railroad  and  utility  legis- 
lation would  include,  in  addition  to  the  so-called  comu 
mission  laws,  all  special  franchises  and  charters,  with 
such  restrictions  as  they  contain,  and  all  direct  legislation 
imposing  duties  upon  utilities  for  the  enforcement  of 
which  no  provision  is  made.  A  comprehensive  survey 
of  commission  legislation,  even,  would  include  many  laws 


144  Railway  Regulation 

whereby  duties  are  imposed  upon  utilities  by  direct  legis- 
lative enactment  with  power  of  enforcement  vested  in 
commissions. 

This  chapter  deals  almost  exclusively  with  commission 
laws.  Emphasis  is  here  placed  upon  the  organization 
and  powers  of  commissions  rather  than  upon  the  duties 
of  utilities.  Since  the  authority  of  the  Interstate  Com- 
merce Commission  extends  primarily,  if  not  entirely,  to 
interstate  business,  it  is  given  no  consideration  in  this 
chapter,  in  spite  of  its  large  influence  upon  recent  state 
commission  legislation.  Municipal  commissions  are  ob- 
viously beyond  the  scope  of  this  chapter.  Although  there 
has  been  considerable  American  experience  with  munici- 
pal commissions  (usually  deriving  their  direct  authority 
from  municipalities  and  exercising  jurisdiction  over  util- 
ities whose  business  is  confined  within  these  municipal- 
ities), the  general  trend  of  commission  regulation  seems 
to  be  toward  the  establishment  of  central  commissions 
whose  authority  is  state-wide,  even  for  such  utilities  as 
are  local  in  character.  In  the  case  of  steam  railways, 
the  regulating  machinery  is  exclusively  state  and  national. 
In  this  place  an  analysis  is  undertaken  of  the  commission 
laws  of  the  state. 

THE  ORGANIZATION  or  COMMISSIONS 

PERSONNEL  AND  ORGANIZATION 

The  success  of  commission  regulation  will  depend 
largely  upon  the  personnel  of  the  commissions.  Ulti- 
mately, the  personnel  of  railroad  and  public  service  com- 
missions will  be  determined  by  the  attitude  of  the  public 
toward  its  officials  in  general,  and  by  the  confidence  or 
distrust  which  the  public  manifests  towards  the  employ- 
ment in  the  public  service  of  trained  experts  and  men  of 


Regulation  by  the  States  145 

large  business  experience.  This  is  one  of  the  funda- 
mental problems  of  American  democracy,  and  it  cannot 
be  solved  by  mere  legislation.  But  the  effectiveness  of 
commission  regulation  depends  in  large  measure  also 
upon  political  machinery,  and  this  leads  to  a  considera- 
tion of  the  important  legislative  requirements  dealing 
with  commission  organization  and  procedure. 

There  are  at  the  present  time  forty-eight  state  com- 
missions, with  independent  personnel,  representing 
forty-five  separate  jurisdictions.3  Delaware,  Utah,  and 
Wyoming  are  the  only  states  which  have  no  central 
commissions.  New  York,  Massachusetts,  and  South 
Carolina  have  each  two  distinct  commissions. 

SELECTION   OF    COMMISSIONERS 

The  members  of  twenty-seven  of  the  forty-eight  com- 
missions are  appointed  by  the  governor  by  and  with  the 
consent  or  advice  of  the  senate  or  council;  in  one  they 
are  appointed  by  a  railroad  board,  or  a  majority  of  its 
members,  consisting  of  the  governor,  the  lieutenant- 
governor,  and  the  attorney-general;  in  twenty  they  are 
elected  by  the  people.  It  is  generally  recognized  that 
the  appointive  commission,  all  else  being  equal,  is  likely 
to  call  into  the  public  service  better  and  abler  men  than 
the  elective  commission.  And  there  is  a  strong  tendency 
towards  the  appointive  commission.  Not  only  is  a  clear 
majority  of  the  commissions  appointive,  but  all  the  states 
which  legislated  during  the  year  1913  created  appointive 
commissions.4 

3  A  complete  list  of  the  state  railroad  and  public  utility  commissions  will 
be  found  at  the  end  of  this  chapter. 

4  Idaho,  Illinois,  Indiana,  Massachusetts,  Missouri,  Montana,  Ohio,  Penn 
sylvania  and  West  Virginia. 


146  Railway  Regulation 

NUMBER  OF  COMMISSIONERS  AND  LENGTH   OF   TENURE 

The  number  of  commissioners  varies  from  three  to 
seven.  Thirty-eight  commissions  have  three  members; 
one  has  four ;  eight  have  five ;  one  has  seven.  The  term 
of  office  varies  from  two  years  in  Arkansas  and  North 
Dakota  to  ten  years  in  Pennsylvania.  In  five  jurisdic- 
tions the  tenure  is  three  years;  in  six,  four  years;  in 
three,  five  years ;  in  thirty,  six  years ;  in  one,  eight  years. 
It  is  evident  that  a  strong  tendency  exists  to  give  the 
commissioners  a  tenure  long  enough  to  make  them  expert 
in  their  work,  even  if  they  are  not  so  when  they  take 
office. 

COMPENSATION  OF  COMMISSIONERS 

The  compensation  of  commissioners  varies  from  $1,500 
in  South  Dakota  to  $15,000  in  New  York.  In  one  com- 
mission the  salary  is  $1,700  per  annum;  in  one,  $1,900; 
in  four,  $2,000 ;  in  one,  $2,200 ;  in  three,  $2,500 ;  in  nine, 
$3,000;  in  one,  $3,500;  in  nine,  $4,000;  in  two,  $4,500;  in 
four,  $5,000 ;  in  one,  $5,500 ;  in  four,  $6,000 ;  in  one,  $7,500 ; 
in  one,  $8,000;  in  two,  $10,000;  and  in  two,  $15,000.  It 
will  be  noted  that  in  fifteen  commissions  the  salaries  are 
$5,000  or  over  and  in  thirty-three  they  are  less  than 
$5,000.  In  nine  commissions  they  are  less  than  $2,500. 
In  the  recent  legislation,  however,  the  tendency  is  to 
provide  a  reasonably  adequate  salary  for  the  commis- 
sioners. Illinois  and  Pennsylvania,  for  example,  in  their 
new  laws,  provide  a  salary  of  $10,000  for  each  of  the 
commissioners ;  Massachusetts,  $8,000 ;  Ohio,  Indiana  and 
West  Virginia,  $6,000;  Missouri,  $5,500;  and  Idaho, 
$4,000. 


Regulation  by  the  States  147 

SUBORDINATE  OFFICIALS  AND  ADMINISTRATIVE  STAFF 

In  addition  to  the  commissioners,  provision  is  often 
made  in  the  statutes  for  a  secretary  or  clerk  and  for  a 
special  attorney  to  the  commission.  Such  provision  for 
a  secretary  or  clerk  is  found  in  thirty-five  jurisdictions, 
and  for  a  special  attorney  in  twenty-two  jurisdictions. 
In  some  states  the  attorney-general  is  directed  to  act  on 
behalf  of  the  commission  and  to  appoint  such  other 
counsel  as  may  be  necessary.  In  thirty  jurisdictions  the 
salary  of  the  secretary  or  clerk  is  fixed  by  statute,  vary- 
ing from  $1,200  to  $6,000.  In  nine  jurisdictions  the  salary 
of  the  attorney  to  the  commission  is  fixed  by  statute,  vary- 
ing from  $2,500  to  $10,000. 

In  most  of  the  jurisdictions  it  is  further  provided  that 
the  commission  may  employ  such  subordinates  as  it  deems 
essential  for  the  adequate  performance  of  its  duties. 
The  following  provision  from  the  recent  Massachusetts 
public  service  commission  law  indicates  the  general  tend- 
ency of  commission  legislation  in  the  matter  of  subor- 
dinate employees: 

The  commission  may  appoint  or  employ  such  engineers, 
accountants,  statisticians,  bureau  chiefs,  division  heads,  assist- 
ants, inspectors,  clerks,  and  other  subordinates  as  it  may  deem 
advisable  on  such  terms  of  office  or  employment  and  at  such 
salaries  as  it  may  deem  proper.5 

QUALIFICATIONS   OF   COMMISSIONERS 

In  eight  jurisdictions  commissioners  must  have  special 
qualifications  prescribed  by  statute.  In  G-eorgia  one  of 
the  commissioners  must  be  experienced  in  law,  and  one 
in  the  railroad  business;  in  Kansas  one  must  be  "a 
practical  experienced  business  man,'7  and  one  experienced 

5  Acts  1913,  chap.  784,  §  9. 


148  Railway  Regulation 

in  the  management  or  operation  of  a  common  carrier  or 
public  utility ;  in  Maine  the  chairman  must  be  learned  in 
law,  one  of  the  commissioners  must  be  a  civil  engineer 
experienced  in  the  construction  of  railroads,  and  one  ex- 
perienced in  the  management  and  operation  of  railroads ; 
in  Michigan  one  must  be  an  attorney  having  a  knowledge 
of  and  experience  in  the  law  relating  to  common  carriers, 
and  the  other  two  must  have  a  knowledge  of  traffic  and 
transportation  matters;  in  Nevada  the  chief  commis- 
sioner must  be  an  attorney  at  law  well  versed  in  the  law 
of  railroad  regulation,  the  first  associate  commissioner 
must  be  a  practical  railroad  man  familiar  with  the  opera- 
tion of  railroads,  and  the  second  associate  must  have  a 
general  knowledge  of  railroad  fares,  freights,  tolls  and 
charges ;  in  Virginia  at  least  one  commissioner  must  have 
the  same  qualifications  as  are  required  for  judges  of  the 
supreme  court  of  appeals;  in  West  Virginia  one  of  the 
commissioners  must  be  a  lawyer  of  not  less  than  ten 
years'  actual  experience  at  the  bar;  and  in  Wisconsin 
one  must  have  a  general  knowledge  of  railroad  law,  and 
each  of  the  others  must  have  a  general  understanding 
of  matters  relating  to  railroad  transportation.  In  two 
jurisdictions  the  qualifications  are  very  general  in  char- 
acter. The  new  Massachusetts  public  service  law  pro- 
vides that  each  of  the  commissioners  shall  be  "a  com- 
petent person ' ' ;  and  in  South  Carolina  it  is  provided  that 
the  members  of  the  public  service  commission  shall  be 
"reputable  and  competent  citizens  of  South  Carolina/' 

DISQUALIFICATIONS  FOE  MEMBEKSHIP 

Most  jurisdictions  provide  certain  disqualifications  for 
membership  in  a  railroad  or  pubilc  utility  commission. 
The  disqualification  provisions  of  forty  jurisdictions, 
stated  in  composite  form,  provide  that  no  person  em- 


Regulation  by  the  States  149 

ployed  by,  or  connected  with,  or  holding  any  official 
relation  to,  or  owning  stocks  or  bonds  of,  or  having  any 
direct  or  indirect  or  pecuniary  interest  in  any  public 
utility  over  which  the  commission  has  jurisdiction,  or  of 
the  kind  over  which  the  commission  has  jurisdiction,  is 
eligible  to  membership  in  the  commission.  In  Wisconsin 
it  is  provided  that  no  person  who  has  a  pecuniary  inter- 
est in  any  railroad  or  telegraph  or  express  company  in 
Wisconsin  or  elsewhere  may  become  a  member  of  the 
commission.  In  twenty-six  jurisdictions  it  is  further 
provided  that  no  commissioner,  officer,  or  employee  of 
the  commission  may  engage  in  any  other  business,  em- 
ployment, or  vocation,  or  hold  any  other  political  office. 
In  Idaho  and  West  Virginia  the  prohibition  extends  only 
to  any  other  political  office. 

\ 

COMMISSION  PROCEDURE 

The  determination  of  rules  of  procedure  and  practice 
is  largely  in  the  hands  of  the  commission.  In  two-thirds 
of  the  jurisdictions  authority  is  specifically  conferred 
upon  the  commissions  to  adopt  rules  and  regulations  for 
their  government  and  proceedings.  It  is  usually  pro- 
vided, however,  that  all  hearings  must  be  open  to  the 
public,  and  that  any  party  in  interest  may  be  heard  in 
person  or  by  attorney.  On  the  other  hand,  authority  is 
almost  universally  given  to  the  commissions  to  administer 
oaths,  subpoena  witnesses,  and  order  the  production  of 
books,  records,  and  memoranda  in  proceedings  held 
before  them.  Investigations  and  hearings  are  commonly 
started  on  complaint,  but  it  is  often  provided  that  the 
commission  may  make  summary  investigations  and  hold 
hearings  on  its  own  motion  or  initiative  and  issue  orders 
on  the  basis  of  its  findings. 


150  Eailway  Regulation 

THE  GENERAL  EXTENT  OP  COMMISSION  AUTHORITY 
NUMBEE  AND  GROWTH  OF  COMMISSIONS 

The  general  extent  of  commission  authority  may  be 
examined  from  three  points  of  view.  First,  the  scope 
and  trend  of  regulation  may  be  gathered  from  the  num- 
ber of  commissions  in  existence  and  the  rapidity  of 
their  growth.  There  are  today,  as  already  indicated, 
forty-eight  state  commissions  representing  every  state 
but  Delaware,  Utah,  and  Wyoming.  No  less  than  thirty 
of  these  either  came  into  existence  since  1907  or  have 
been  so  completely  changed  in  character  since  1907  that 
they  are  practically  new  commissions.  Early  in  1913 
the  National  Civic  Federation  completed  a  comprehensive 
compilation  and  analysis  of  laws  for  the  regulation  of 
public  utilities  by  central  commissions.6  In  the  short 
time  that  has  elasped  since  the  results  of  that  investiga- 
tion were  published,  public  service  commissions  have 
been  created  in  two  states,  Idaho  and  West  Virginia, 
where  no  utility  commissions  had  before  existed,  and 
seven  other  states  have  passed  complete  public  service 
laws  now  in  operation.  In  addition  there  has  been  a  mass 
of  amendatory  legislation  whereby  existing  commissions 
have  been  very  largely  transformed. 

JURISDICTION  OF  COMMISSIONS 

The  extent  of  commission  authority  may  be  gaged  also 
by  the  kind  and  number  of  utilities  which  may  be  reached 
in  any  way  by  the  railroad  and  utility  commissions.  The 

6 ' '  Commission  Regulation  of  Public  Utilities :  A  Compilation  and 
Analysis  of  Laws  of  Forty-three  States  and  of  the  Federal  Government  for 
the  Regulation  by  Central  Commissions  of  Railroads  and  Other  Public  Utili- 
ties. ' '  The  National  Civic  Federation,  Department  on  Regulation  of  Inter- 
state and  Municipal  Utilities,  New  York,  1913. 


Regulation  by  the  States  151 

state  commissions  collectively  have  some  degree  of 
authority  over  corporations,  companies,  associations, 
joint-stock  companies,  partnerships,  or  individuals  that 
own,  operate,  manage,  or  control  steam  railroads,  electric 
and  street  railroads,  interurban  or  suburban  railroads, 
elevated  railroads  or  subways,  automobile  railroads, 
steamboats  and  other  water  craft,  express  lines  and 
messenger  lines,  signalling  facilities,  bridges,  and  ferries 
connected  with  railroads,  pipe  lines  for  the  transporta- 
tion of  oil  or  water,  sleeping,  parlor,  and  drawing-room 
cars,  terminals,  union  depots,  docks,  wharves,  storage 
elevators,  fast  freight  lines,  stage  lines,  messenger  serv- 
ice, telegraphs  and  telephones,  irrigation  and  sewage 
facilities,  and  facilities  for  the  manufacture  and  sale  of 
gas,  electricity,  heat,  light,  water,  power,  hot  or  cold  air, 
and  steam. 

Whether  a  given  business  constitutes  a  public  service 
undertaking  depends  largely  upon  the  social  and  in- 
dustrial conditions  that  prevail  in  the  community. 
Whether,  upon  recognition  of  a  given  undertaking  as  a 
public  service  industry,  express  authority  to  regulate 
shall  be  granted  to  commissions,  depends  usually  upon 
the  public  policy  of  the  given  community  and  more  par- 
ticularly upon  the  political  conditions  prevailing  in  that 
community.  The  utilities  to  which  commission  jurisdic- 
tion extends,  therefore,  vary  greatly  in  the  different 
states;  but  the  principles  of  adequate  regulation,  as 
embodied  in  the  various  powers  conferred  upon  commis- 
sions, are  found  to  depend  but  very  slightly  upon  the 
number  and  nature  of  the  utilities  regulated.  This  is 
but  a  recognition  that  public  service  industries  may,  in 
most  respects,  be  treated  as  a  homogeneous  class. 

A  distinction  is  often  made  between  interstate  and 
municipal  utilities,  or  between  railroads  and  other  public 


152  Railway  Regulation 

utilities.  Commission  legislation  but  seldom  distinguishes 
to  any  striking  degree  between  these  classes  of  utilities, 
although  there  is  considerable  variety  in  the  names  of  the 
commissions.  Twenty-two  of  them  are  railroad  commis- 
sions; twelve  are  public  service  commissions;  seven  are 
public  utility  commissions ;  five  are  corporation  commis- 
sions; one  is  a  railroad  and  warehouse  commission;  and 
one  is  a  board  of  gas  and  electric  light  commissioners. 
The  names  of  the  commissions  do  not  always  indicate  the 
scope  of  their  jurisdiction.  Many  of  the  railroad  com- 
missions have  jurisdiction  over  the  so-called  municipal 
utilities;  as,  for  example,  the  railroad  commissions  of 
Oregon  and  Wisconsin.  Most  of  the  public  utility  or 
public  service  commissions  have  jurisdiction  over  rail- 
roads ;  as,  for  example,  the  Massachusetts  and  New  York 
commissions. 

ADVISORY  VERSUS  MANDATORY  COMMISSIONS 

Finally,  the  extent  of  commission  jurisdiction  may  be 
gathered  from  the  powers  vested  in  the  commissions. 
Two  types  of  regulating  boards  have  appeared  in  Amer- 
ican experience:  the  advisory  board,  with  powers  of  in- 
vestigation and  recommendation,  of  which  the  old  Massa- 
chusetts railroad  commission  is  the  most  notable 
example ;  and  the  mandatory  board,  with  power  to  order 
as  well  as  to  recommend,  of  which  the  New  York  and 
Wisconsin  commissions  are  perhaps  the  best  examples. 
The  advisory  commission  relies  upon  publicity  and  the 
strength  of  public  opinion  for  the  enforcement  of  its 
recommendations;  the  mandatory  commission  is  vested 
with  sufficient  power  to  compel  the  utilities  to  submit  to 
its  orders. 

The  advisory  commission  has  been  abandoned  even  in 
Massachusetts.  Large  powers  are  now  granted  to  the 


Regulation  by  the  States  153 

commissions;  the  duty  of  utilities  to  comply  with  the 
orders  of  the  commissions  is  clearly  stated;  the  commis- 
sions are  given  authority  to  invoke  judicial  process  for 
the  enforcement  of  their  orders,  and  usually  penalties, 
varying  in  stringency,  are  imposed  upon  utilities  for 
failure  to  comply  with  these  orders.  Since  the  enactment 
of  the  Wisconsin  railroad  commission  law  in  1905  and 
of  the  Hepburn  amendments  to  the  Act  to  Regulate 
Commerce  in  1906,  practically  all  utility  legislation  has 
proceeded  on  the  basis  of  clothing  commissions  with 
ample  power  to  exercise  continuous  supervision  over 
railroads  and  other  public  utilities  and  to  afford  effectual 
relief  to  any  party  in  interest  whenever  necessary.  The 
authority  to  prescribe  just  and  reasonable  rates,  there- 
fore, is  almost  universally  enjoyed  by  the  modern  type 
of  railroad  or  public  service  commission. 

GENERAL  GRANTS  OP  AUTHOKITY 

In  addition  to  such  specific  powers  as  are  necessary 
for  adequate  public  control,  commissions  now  possess 
large  general  powers  of  investigation  and  supervision 
over  the  property  and  business  of  public  utilities.  This 
general  power  of  regulation  is  stated  in  most  compre- 
hensive fashion  in  the  Illinois  public  utilities  commis- 
sion law,  as  follows: 

The  commission  shall  have  general  supervision  of  all  public 
utilities,  shall  inquire  into  the  management  of  the  business 
thereof  and  shall  keep  itself  informed  as  to  the  manner  and 
method  in  which  the  business  is  conducted.  It  shall  examine 
such  public  utilities  and  keep  informed  as  to  their  general  con- 
dition, their  franchises,  capitalization,  rates  and  other  charges, 
and  the  manner  in  which  their  plants,  equipments  and  other 
property  owned,  leased,  controlled  or  operated  are  managed, 
conducted  and  operated,  not  only  with  respect  to  the  adequacy, 


154  Railway  Regulation 

security  and  accommodation  afforded  by  their  service,  but  also 
with  respect  to  their  compliance  with  the  provisions  of  this  act 
and  any  other  law,  with  the  orders  of  the  commission,  and  with 
the  charter  and  franchise  requirements.7 

The  following  provision  of  the  Wisconsin  public  util- 
ities act  is  found  in  most  jurisdictions,  and  further  indi- 
cates the  nature  of  the  general  powers  vested  in  commis- 
sions, so  far  as  they  are  essential  to  a  proper  performance 
of  their  duties : 

The  commission  or  any  commissioner  or  any  person  or  persons 
employed  by  the  commission  for  that  purpose  shall,  upon  demand, 
have  the  right  to  inspect  the  books,  accounts,  papers,  records, 
and  memoranda  of  any  public  utility  and  to  examine,  under 
oath,  any  officer,  agent,  or  employee  of  such  public  utility  in 
relation  to  its  business  and  affairs.8 

We  may  now  present  a  brief  review  of  the  more 
important  specific  powers  vested  in  railroad  and  public 
utility  commissions. 

THE  REGULATION  OF  FRANCHISES 
OBJECTS  OF  FRANCHISE  REGULATION 

The  important  provisions  in  commission  laws  looking 
to  franchise  regulation  aim  to  prevent  unnecessary  dupli- 
cation of  utility  properties  through  the  introduction  of 
competition  where  the  public  welfare  demands  the  recog- 
nition of  monopoly,  and  to  provide  for  the  uninterrupted 
operation  of  utilities,  under  adequate  control  of  rates 
and  service,  subject  to  public  purchase  whenever  such 
private  operation  ceases  to  promote  the  public  good. 

7  Acts  1913,  House  BiU  No.  907,  §  8. 

8  Laws  1907,  chap.  499,  §  1799m-38. 


Regulation  by  the  States  155 

CERTIFICATES   OF   CONVENIENCE   AND   NECESSITY 

The  first  of  these  purposes  has  been  accomplished  by 
requiring  the  issue  of  a  certificate  of  convenience  and 
necessity  by  the  commission  before  a  public  utility  may 
enter  upon  a  new  undertaking,  or  extend  an  existing 
undertaking,  or  exercise  franchise  privileges  previously 
granted  but  not  theretofore  exercised.  The  essential  ele- 
ments of  the  certificate  of  convenience  and  necessity  are 
stated  as  follows  in  the  New  Hampshire  public  service 
commission  law: 

No  public  utility  shall  commence  within  this  state  the  business 
of  transmission  of  telephone  or  telegraph  messages,  or  of  sup- 
plying the  public  with  gas,  electricity  or  water,  or  shall  engage 
in  such  business  or  begin  the  construction  of  a  plant,  line,  main, 
or  other  apparatus  or  appliance  intended  to  be  used  therein  in 
any  city  or  town  in  which  at  the  time  it  shall  not  already  be 
engaged  in  such  business,  or  shall  exercise  any  right  or  privilege 
under  any  franchise  hereafter  granted  (or  any  franchise  hereto- 
fore granted,  but  not  heretofore  actually  exercised)  in  such  town, 
without  first  having  obtained  the  permission  and  approval  of  the 
commission.  The  commission  shall  grant  such  permission  when- 
ever it  shall,  after  due  hearing,  determine  and  find  that  such 
engaging  in  business,  such  construction  or  such  exercise  of  the 
right,  privilege  or  franchise  would  be  for  the  public  good  and 
not  otherwise ;  and  may  prescribe  such  terms  and  conditions  upon 
the  exercise  of  the  privilege  granted  under  such  permission  as 
it  shall  consider  for  the  public  interest.  Authority  granted 
under  the  provisions  of  this  section  may  only  be  exercised  within 
two  years  after  the  same  shall  be  granted,  and  shall  not  be 
exercised  thereafter.9 

Provisions  substantially  identical  with  the  New  Hamp- 
shire section  are  found  in  nineteen  jurisdictions.10  It  is 

9  Laws  1911,  chap.  164,  §  13  (a). 

10  Arizona,    California,    Connecticut,    Idaho,    Illinois,    Indiana,    Kansas, 
Maine,  Maryland,  Massachusetts,  Michigan,  Missouri,  New  Hampshire,  New 
York,  Pennsylvania,  South  Dakota,  Vermont,  West  Virginia  and  Wisconsin. 


156  Railway  Regulation 

to  be  noted  that  practically  all  the  states  which  passed 
complete  laws  during  1913  provide  for  certificates  of 
convenience  and  necessity. 

INDETERMINATE  FRANCHISES 

The  other  purpose  of  the  franchise  provisions  of  com- 
mission laws  is  to  recognize  the  essentially  monopolistic 
character  of  public  utilities  by  providing  for  their  con- 
tinuous operation,  during  good  behavior,  under  a  permit 
unlimited  as  to  time,  with  power  in  the  public  authorities 
to  exercise  an  option  of  purchase.  The  indeterminate 
franchise  was  first  established  in  Massachusetts,  where 
street  railway  locations  may  be  revoked  by  local  author- 
ities (the  revocation  being  subject  to  approval  by  the 
commission  in  certain  cases)  at  any  time  after  the  expira- 
tion of  one  year  from  the  date  of  the  franchise. 

The  most  thorough-going  indeterminate  franchise  law 
is  to  be  found  in  Wisconsin.  It  was  enacted  in  1907  and 
materially  amended  in  1911.  It  provides  for  indetermi- 
nate permits  for  street  railways  and  for  heat,  light,  water, 
and  power  companies  in  municipalities.  The  indetermi- 
nate permit  was  first  to  apply  to  all  future  grants,  with 
authority  for  companies  operating  under  limited-term 
franchises  to  exchange  them  for  indeterminate  permits. 
The  amendment  of  1911  provided  that  all  franchises 
theretofore  granted  were  to  become  indeterminate. 

The  essential  characteristics  of  the  principle  of  inde- 
terminate franchises  are:  first,  that  the  public  service 
corporation  is  recognized  as  a  legal  monopoly,  and  no 
permit  is  granted  to  a  competing  company,  unless  public- 
convenience  and  necessity  require  such  grant ;  and  second, 
that  the  public  service  company,  in  accepting  an  inde- 
terminate permit,  consents  to  the  purchase  of  its  plant 
by  the  municipality  in  which  it  operates.  The  purchase 


Regulation  by  the  States  157 

price  is  to  be  fixed  by  the  commission,  subject  to  review 
by  the  courts.  The  new  public  service  commission  law 
of  Indiana  provides  for  indeterminate  permits  similar  to 
those  established  in  Wisconsin. 

THE  REGULATION  OF  SECURITY  ISSUES 

In  fifteen  jurisdictions  the  commission  has  authority 
to  supervise  the  issue  of  stocks  and  bonds.11  In  some 
of  these  jurisdictions  the  commission's  power  is  stated 
in  general  terms  and  does  not  provide  for  a  strict 
control  of  capitalization.  The  New  Jersey  law,  for 
example,  merely  provides  that  no  public  utility  shall 
' '  issue  any  stocks,  stock  certificates,  bonds  or  other  evi- 
dences of  indebtedness  payable  in  more  than  one  year 
from  the  date  thereof,  until  it  shall  have  first  obtained 
authority  from  the  board  for  such  proposed  issues.  It 
shall  be  the  duty  of  the  board,  after  hearing,  to  approve  of 
any  such  proposed  issue  maturing  in  more  than  one  year 
from  the  date  thereof,  when  satisfied  that  the  same  is  to 
be  made  in  accordance  with  law  and  the  purpose  of  such 
issue  be  approved  by  said  board. " 12 

In  many  of  the  states,  however,  the  commission  has 
complete  control,  definite  financial  standards  being  pre- 
scribed and  provisions  being  made  for  thorough  investi- 
gation and  valuation  by  the  commission  before  approval 
of  security  issues,  and  for  detailed  supervision  of  the 
disposition  of  the  proceeds  after  the  commission's  cer- 
tificate has  been  granted.  The  most  valuable  experience 
in  the  regulation  of  security  issues  is  to  be  found  in  New 
York,  Massachusetts,  Texas,  and  Wisconsin.  The  Wis- 

11  Arizona,  California,  Kansas,  Illinois,  Indiana,  Massachusetts,  Michi- 
gan, Missouri,  New  Hampshire,  New  Jersey,  New  York,  Pennsylvania,  Texas, 
Vermont  and  Wisconsin. 

12  Laws  1911,  chap.  195,  §18   (e). 


158  Railway  Regulation 

consin  stock  and  bond  law,  for  example,  applying  to  rail- 
roads and  to  street  railway,  telegraph,  telephone,  express, 
freight  line,  sleeping-car,  light,  heat,  water  and  power 
corporations,  establishes  a  comprehensive  system  of 
regulating  security  issues  by  commission.  It  affords  a 
practical  guarantee  by  the  state  that  there  is  an  equiva- 
lence between  the  amount  of  outstanding  securities  and 
the  investment  upon  which  the  utilities  are  entitled  to  a 
fair  return.  Legislation  of  similar  scope  may  be  found 
in  five  other  states,  three  of  which  legislated  during  the 
year  1913. 

THE  REGULATION  OF  BATES  AND  SERVICE 

Commission  laws  lay  down  the  foundations  of  rate- 
making,  or  the  requisites  of  lawful  rates,  prohibit  unjust 
discrimination,  prescribe  publicity  in  the  making  of  rates 
and  schedules,  and  vest  in  commissions  the  power  to  fix 
rates  in  accordance  with  the  principles  thus  prescribed. 

FOUNDATIONS  OF  RATE-MAKING 

It  is  almost  invariably  provided  that  rates  and  charges 
shall  be  just  and  reasonable,  and  the  commissions  are 
given  authority  to  enforce  the  standard  thus  established. 
In  many  jurisdictions  the  various  elements  that  must  be 
considered  and  the  various  devices  that  may  be  adopted 
in  the  establishment  of  reasonable  rates  by  utilities  and 
commissions  are  further  prescribed. 

The  chief  elements  emphasized  by  the  statutes  for  law- 
ful rates  are  that  a  due  regard  be  accorded  "to  a  reason- 
able average  return  upon  the  value  of  the  property 
actually  used  in  the  public  service  and  to  the  necessity  of 
making  reservation  out  of  income  for  surplus  and  con- 


Regulation  by  the  States  159 

tingencies. ' ' 13  Twenty-four  jurisdictions  make  express 
provision  for  the  valuation  of  the  property  of  railroads 
and  other  public  utilities  by  commissions.14  These  valua- 
tions are  sometimes  used  for  capitalization  and  purchase 
as  well  as  for  rate-making  purposes.  The  tendency  in 
these  valuation  provisions  is  to  vest  in  the  commissions 
ample  power  for  the  successful  ascertainment  of  the 
investment  value.  Such  elaborate  valuation  provisions 
may  be  found  in  Ohio,  Pennsylvania,  Washington,  and 
Wisconsin. 

The  main  device  provided  by  statute  through  which  rea- 
sonable rates  may  be  assured  is  the  sliding  scale,  chiefly 
applicable  to  the  gas  industry,  but  also,  in  some  cases, 
to  electric  companies.  The  sliding  scale  method  of  regu- 
lating rates  is  a  device  by  means  of  which  rates  auto- 
matically decrease  as  profits  increase.  For  example,  the 
price  of  gas  may  be  fixed  at  85  cents  per  thousand  cubic 
feet  and  the  dividend  rate  at  that  price  may  be  limited  to 
7  per  cent.  For  every  decrease  of  5  cents  per  thousand 
in  the  price  of  gas,  the  dividend  rate  increases  1  per 
cent.  Thus  both  the  public  and  the  public  service  cor- 
poration share  in  the  profits  resulting  from  increased 
economies  of  production.  In  addition  to  the  Boston 
sliding-scale  act  in  Massachusetts,  nine  jurisdictions 
authorize  utilities  to  establish  the  sliding  scale  for  the 
automatic  adjustment  of  charges  and  dividends  under 
commission  supervision.15 

13  New  York:  Laws  1910,  Ch.  480,  §  9Y. 

14  Arizona,    Arkansas,    California,    Florida,   Georgia,    Illinois,    Indiana, 
Kansas,  Maryland,  Massachusetts,  Michigan,  Minnesota,  Missouri,  Nebraska, 
New  Jersey,  Ohio,  Oklahoma,  Oregon,  Pennsylvania,  S'outh  Dakota,  Texas, 
Washington,  West  Virginia,  Wisconsin. 

15  Arizona,   California,   Idaho,   Maryland,    Missouri,   New   York,   Ohio, 
Pennsylvania,  Wisconsin. 


160  Railway  Regulation 

DISCRIMINATION  IN  BATES  AND  SERVICE 

The  laws  regularly  provide  also  that  unjust  dis- 
crimination is  prohibited,  and  the  commissions  are  given 
authority  to  enforce  the  prohibitions.  Unjust  discrimina- 
tion is  variously  defined.  As  defined  in  the  commission 
laws  collectively,  it  comprises  the  following  acts: 

(1)  Charging  a  greater  or  less  compensation  to  one 
person  than  to  another  for  like  and  contemporaneous 
service ; 

(2)  Charging  rates  other  than  those  prescribed  by 
law  or  specified  in  published  schedules,  refunding,  remit- 
ting, or  rebating  any  portions  of  such  rates,  or  extending 
privileges  or  facilities  not  uniformly  open  to  all ; 

(3)  Charging  a  less  compensation  in  consideration  of 
the  furnishing  by  utilities  of  any  part  of  the  facilities 
incident  to  the  service ; 

(4)  Charging  a  less  compensation  in  consideration  of 
the  size  of  the  shipment  or  the  extent  of  the  service ; 

(5)  Charging  a  greater  compensation  for  a  shorter 
than  for  a  longer  distance,  or  for  a  smaller  than  for  a 
larger  service; 

(6)  Granting  to  any  person,  corporation,  locality,  or 
any  particular  description  of  service,  any  undue  or  un- 
reasonable preference  or  advantage,   or  in  subjecting 
the  same  to  any  undue  or  unreasonable  prejudice  or  dis- 
advantage ; 

(7)  Assisting  or  permitting  patrons  to  secure  special 
favors  or  advantages,  or  rates  other  than  those  lawfully 
established ; 

(8)  Soliciting,  accepting  or  receiving  special  favors, 
or  advantages,  or  rates  other  than  those  lawfully  estab- 
lished. 

There  are  also  general  prohibitions  against  offering, 


Regulation  by  the  States  161 

granting,  soliciting,  or  accepting  free  or  reduced  rate  or 
special  service,  with  elaborate  lists  of  exceptions;  spe- 
cial prohibitions  applicable  to  public  officials  and  mem- 
bers of  political  organizations;  and  requirements  that 
lists  of  persons  to  whom  free  or  reduced  rate  or  special 
service  has  been  granted  shall  be  published  and  filed  with 
the  commission.  The  provisions  also  indicate  the  kinds 
of  special  treatment  which  constitute  justifiable  discrim- 
ination and  authorize  the  commissions  to  determine  under 
what  conditions  such  circumstances  exist  as  make  dis- 
crimination justifiable. 

PUBLICITY   REQUIREMENTS 

Again,  it  is  almost  invariably  required  that  utilities 
submit  to  full  publicity  in  the  establishment  and  change 
of  their  rates  and  schedules,  and  authority  is  vested  in 
the  commissions  to  render  publicity  in  rate-making 
effective.  Utilities  are  thus  ordered  to  file  their  schedules 
of  rates  with  the  commissions,  after  due  notice  of  their 
adoption ;  the  matters  to  be  contained  in  these  schedules 
are  prescribed  in  detail ;  the  forms  of  schedules  are  made 
subject  to  the  approval  of  the  commissions ;  it  is  provided 
that  the  schedules  be  published  and  posted;  the  filing, 
publishing,  and  posting  of  rate  schedules  is  often  made 
a  condition  precedent  to  the  exercise  by  utilities  of  the 
right  to  do  business ;  and  utilities,  in  many  instances,  are 
required  to  file  with  the  commissions  copies  of  leases, 
contracts,  and  arrangements  made  with  other  utilities. 

ESTABLISHMENT  AND  CHANGE  OF  RATES 

The  important  powers  as  to  rates  are  found  in  the 
provisions  which  authorize  commissions  to  regulate  or 
prescribe  the  rates  and  charges  of  railroads  and  other 
public  utilities,  establish  the  procedure  to  be  followed 


162  Railway  Regulation 

in  the  exercise  of  these  powers,  and  indicate  the  legal 
effect  to  be  given  to  the  rates  and  charges  so  established. 
All  the  states  now  give  the  commissions  mandatory 
powers  over  rates.  In  many  of  the  jurisdictions  there 
is  language  so  broad  that  it  may,  by  liberal  interpreta- 
tion, be  construed  to  vest  in  the  commissions  power 
to  fix  rates  in  the  first  instance.  When  the  legislation 
in  each  jurisdiction  is  taken  as  a  whole,  however,  the 
authority  of  the  commissions  in  practically  all  the 
commission  states  is  limited  to  the  power  on  its  own 
motion  or  on  complaint,  after  investigation,  to  declare 
rates  and  charges  previously  in  force  to  be  unrea- 
sonable, and  to  prescribe  others  in  lieu  thereof  to  be 
followed  in  the  future.  In  other  words,  in  spite  of  the 
large  power  over  rates  vested  in  commissions,  the  right 
to  initiate  rates  is  practically  everywhere  reserved  to 
the  railroads  and  other  utilities ;  but  in  about  one-third 
of  the  jurisdictions  the  commissions  are  given  the  addi- 
tional authority  to  suspend  the  operation  of  rates  fixed 
by  railroads  and  other  utilities  pending  an  investigation 
as  to  their  reasonableness  undertaken  by  the  commis- 
sions. In  some  jurisdictions  the  rates  fixed  by  commis- 
sions are  considered  prima  facie  lawful  and  in  force 
until  found  unreasonable  upon  review  by  a  proper  court ; 
in  some  states  their  operation  is  suspended  until  declared 
reasonable  upon  judicial  review. 

ADEQUACY  AND  SAFETY  OF   SERVICE 

Many  of  the  rate  provisions,  in  so  far  as  they  empower 
commissions  to  supervise  the  business  of  utilities,  apply 
to  regulations,  practices  and  service.  But  while  more 
than  one-half  of  the  states  provide  that  the  service  fur- 
nished by  utilities  must  be  reasonable,  or  that  the  facili- 
ties must  be  adequate  and  safe,  only  about  one-third  of 


Regulation  by  tine  States  163 

the  commission  jurisdictions  vest  sufficient  authority  in 
the  commissions  to  render  these  requirements  effective. 
The  practice  in  the  past  has  been  to  establish  by  direct 
legislative  enactment  absolute  standards  of  service  and 
safety,  together  with  specific  facilities  and  safety  appli- 
ances. The  present  tendency,  however,  as  evidenced  by 
much  of  the  recent  legislation,16  is  to  clothe  commissions 
with  power  over  service  and  facilities,  both  as  to 
adequacy  and  as  to  safety,  commensurate  with  their 
power  over  rates.  The  more  recent  commissions,  there- 
fore, are  authorized  to  prescribe  reasonable  service 
standards  and  to  provide  for  such  inspection  and  testing 
of  service  and  facilities  as  will  insure  their  adequacy 
and  safety. 

THE  KEGULATION  OF  ACCOUNTS  AND  REPOKTS 

The  regulation  of  accounts  and  reports  serves  to  pro- 
vide for  commissions  the  data  essential  to  an  adequate 
control  of  capitalization,  rates  and  service. 

ACCOUNTING  PRACTICES 

There  are  provisions  for  the  regulation  of  accounts  in 
twenty-eight  jurisdictions.  The  most  general  require- 
ment is  that  by  which  authority  is  granted  to  commis- 
sions to  establish  a  system  of  uniform  accounts  for  public 
utilities,  with  power  to  prescribe  the  forms  of  accounts, 
records,  and  memoranda,  and  to  indicate  the  manner  in 
which  they  shall  be  kept,  or  to  classify  public  utilities 
and  establish  a  system  of  accounts  and  prescribe  forms 
for  each  class.  In  most  jurisdictions  this  power  may  be 
exercised  at  the  discretion  of  the  commission.  Some- 
times, as  in  the  new  Indiana  law,  the  authority  to  pre- 
16  Idaho,  Illinois,  Indiana,  Missouri,  Pennsylvania  and  West  Virginia. 


164  Railway  Regulation 

scribe  accounting  practices  is  made  mandatory  upon  the 
commission.  In  a  number  of  the  jurisdictions  it  is  fur- 
ther made  unlawful  for  utilities  to  keep  any  other 
accounts,  records,  or  memoranda  than  those  prescribed 
or  approved  by  the  commission.  In  the  case  of  railroads 
and  other  common  carriers,  the  commissions  are  often 
specifically  required  to  conform,  as  far  as  possible,  to  the 
system  of  accounts  established  and  prescribed  from  time 
to  time  by  the  Interstate  Commerce  Commission. 

In  about  one-fourth  of  the  states — Arizona,  Califor- 
nia, Idaho,  Illinois,  Indiana,  Missouri,  New  Jersey,  Ohio, 
Oregon,  Pennsylvania  and  Wisconsin — special  deprecia- 
tion accounts  are  provided  for.  The  commission  is  em- 
powered to  require  proper  and  adequate  depreciation  or 
deferred-maintenance  accounts  to  be  kept  in  accordance 
with  prescribed  forms  and  regulations,  whenever  it  shall 
determine  that  depreciation  accounts  can  reasonably  be 
required. 

Moreover,  the  commissions  are  given  authority  to 
examine  as  well  as  to  prescribe  accounts — that  is, 
the .  commission  or  the  commissioners,  or  their  duly  au- 
thorized agents  or  examiners,  may  have  access  to  the 
accounts  of  the  utilities  and  may  at  all  reasonable  times 
examine  and  inspect  them.  Heavy  penalties  are  usually 
imposed  for  violations  of  accounting  provisions. 

REPORTS   AND  STATISTICS 

The  duty  is  almost  invariably  imposed  upon  utilities 
to  transmit  to  the  commission,  at  specified  intervals  or 
at  such  time  as  the  commission  may  designate,  regular 
reports  of  their  doings  setting  forth  such  facts,  statistics, 
and  particulars  relative  to  their  business,  receipts,  and 
expenditures  as  may  be  required  by  the  commission.  In 
many  states  special  reports  may  also  be  called  for  by 


Regulation  by  the  States  165 

the  commission  at  different  intervals.  It  is  often  pro- 
vided that  the  commission  shall  furnish  blank  forms  for 
regular  or  special  reports,  and  the  reports  must  he  duly 
sworn  to  or  verified  hy  such  officers  or  persons  as  the 
commission  may  designate.  Full  and  specific  answers 
must  be  given  to  all  questions  propounded  by  the  com- 
mission, or  sufficient  reasons  must  be  stated  for  ^failure 
to  make  such  answers.  In  case  the  reports  or  returns 
appear  to  be  defective  or  erroneous,  the  commission  is 
usually  given  the  power  to  order  their  amendment 
within  a  specified  time.  It  was  very  common  in  the 
older  utility  laws,  particularly  for  the  regulation  of  rail- 
roads and  common  carriers,  to  prescribe  by  statute  the 
detailed  contents  of  annual  reports ;  but  in  pursuance  of 
the  general  trend  of  giving  commissions  ample  discre- 
tion in  the  regulation  of  utilities,  the  more  advanced 
legislation,  including  most  of  the  recent  laws,  vests  com- 
plete power  in  the  commissions  as  to  the  scope  of  the 
reports  to  be  made  by  railroads  and  other  utilities. 
Heavy  penalties  are  usually  imposed  for  the  violation  of 
provisions  relating  to  reports  and  statistics. 

STATE  VEKSUS  FEDERAL  BEGULATION 

The  policies,  principles,  and  rules  of  administrative 
public  control  analyzed  and  examined  in  the  preceding 
pages  were  applied  by  the  states  to  the  regulation  of 
railways  long  before  they  were  generally  extended  to  the 
supervision  of  other  public  utilities.  In  the  course  of 
time,  however,  with  the  growth  of  railway  mileage  and 
the  development  of  interstate  traffic,  railway  enterprise 
came  to  exert  a  larger  and  larger  national  influence  and 
its  problems  came  to  be  considered  national  problems 
in  constantly  increasing  measure.  A  system  of  federal 


166  Railway  Regulation 

regulation  of  railways,  the  character  of  which  will  be 
considered  in  a  later  chapter,  inevitably  followed,  and 
the  activities  of  the  state  railroad  and  public  service 
commissions  began  to  be  extended  to  the  so-called  local 
or  municipal  utilities.  The  gradual  extension  of  the 
jurisdiction  of  the  state  commissions  did  not  result,  how- 
ever, in  a  relinquishment  of  their  authority  over  railroads. 
The  railways  came  to  be  regulated,  therefore,  by  the  two- 
fold agencies  of  the  nation  and  the  states,  and  their 
respective  spheres  of  action  began  to  be  marked  out  by 
the  enactments  of  our  legislatures  and  the  decisions  of 
our  courts.  The  problems  involved  in  the  conflict  be- 
tween state  and  federal  authority  which  gradually  de- 
veloped are  considered  in  the  next  chapter. 


LIST  OF  STATE  RAILROAD  AND  PUBLIC  SERVICE 
COMMISSIONS 

The  following  is  a  complete  list  of  state  railroad  and 
public  service  commissions.  It  is  unnecessary,  for  the 
purposes  of  this  text,  to  present  an  exhaustive  list  of  con- 
stitutional and  statutory  sources;  but  all  the  more  im- 
portant commission  laws  are  given,  and  reference  is 
made  to  such  other  provisions  as  deal  with  the  creation 
and  organization  of  commissions. 

Alabama:  Eailroad  Commission  of  Alabama  (Code 
1907,  §§  5632,  5633,  5636,  5637,  5640,  5642). 

Arizona:  Corporation  Commission  (Session  Laws  1912, 
chap.  90). 

Arkansas:  Eailroad  Commission  of  Arkansas  (Kirby's 
Digest  1904,  §§  6788,  6789,  6793). 


Regulation  by  the  States  167 

California:  Railroad  Commission  of  the  State  of  Cali- 
fornia (Statutes  1911, 1st  Extra  Session,  chaps.  14,  40). 

Colorado:  Public  Utilities  Commission  of  Colorado 
(Laws  1910,  Special  Session,  chap.  5). 

Connecticut:  Public  Utilities  Commission  (Public  Acts 
1911,  chap.  128). 

Florida:  Railroad  Commissioners  for  the  State  of  Flor- 
ida (Gen.  Sts.  1906,  §§  2882,  2883,  2887— as  amended 
1907). 

Georgia:  Railroad  Commission  of  Georgia  (Code  1911, 
§§2616,  2620,  2621,  2622,  2625.  Acts  1878-79,  No. 
269,  §1). 

Idaho:  Public  Utilities  Commission  of  the  State  of  Idaho 
(Session  Laws  1913,  House  Bill  No.  21). 

Illinois:  State  Public  Utilities  Commission  (Acts  1913, 
House  Bill  No.  907). 

Indiana:  Public  Service  Commission  of  Indiana  (Acts 
1913,  House  Bill  No.  361). 

Iowa:  Board  of  Railroad  Commissioners  (Code  1897, 
§§2111,  2121). 

Kansas:  Public  Utilities  Commission  (Gen.  Sts.  1909, 
§  7185.  Laws  1911,  chap.  238). 

Kentucky:  Railroad  Commission  (Constitution,  §  209. 
Carroll's  Statutes  1909,  §§  821-823). 

Louisiana:  Railroad  Commission  of  Louisiana  (Consti- 
tution, Arts.  283,  287,  289). 

Maine:  Public  Utilities  Commission  (Rev.  Sts.  1903, 
chap.  51,  §  48 — as  amended  by  Public  Laws  1909,  chap. 
141 ;  chap.  116,  §  1). 

Maryland:  Public  Service  Commission  (Laws  1910, 
chap.  180.  Laws  1912,  chap.  563). 

Massachusetts:  Board  of  Gas  and  Electric  Light  Com- 
missioners. (Rev.  Laws  1902,  chap.  121,  §  1 — as 


168  Railway  Regulation 

amended  by  Acts  1907,  chap.  316.    Acts  1910,  chap.  539, 

§  1) ;  Public  Service  Commission  (Acts  1913,  chap.  784). 
Michigan:    Michigan  Eailroad  Commission  (Public  Acts 

1909,  No.  300). 
Minnesota:    Eailroad  and  Warehouse  Commission  (Eev. 

Laws  1905,  §§  1953  and  1956 — as  amended  by  Laws 

1911,  chap.  140;  1961). 
Mississippi:     Mississippi  Eailroad   Commission   (Code 

1906,  §§4826,  4828,  4830). 

Missouri:  Public  Service  Commission  (Public  Service 
Commission  Law  of  March  17,  1913). 

Montana:  Eailroad  and  Public  Service  Commission 
(Public  Service  Commission  Law  of  1913). 

Nebraska:  Nebraska  State  Eailway  Commission  (Cob- 
bey's  Annotated  Statutes  1909,  §§  10649,  10650). 

Nevada:     Eailroad   Commission   of   Nevada    (Statutes 

1907,  chap.  44 — as  amended  by  Statutes  1911,  chap. 
193) ;  Public  Service  Commission  of  Nevada  (Statutes 
1911,  chap.  162).     The  personnel  of  the  two  commis- 
sions is  the  same,  the  railroad  commission  being  ex 
officio  the  public  service  commission. 

New  Hampshire:  Public  Service  Commission  (Laws 
1911,  chap.  164). 

New  Jersey:  Board  of  Public  Utility  Commissioners 
(Laws  1911,  chap.  195). 

New  Mexico:  State  Corporation  Commission  (Constitu- 
tion, Art.  XI,  §  1.  Laws  1912,  chap.  78). 

New  York:  Public  Service  Commission,  First  District 
(Laws  1910,  chap.  480 — as  amended  through  1913) ; 
Public  Service  Commission,  Second  District  (Same 
citation  as  for  First  District  Commission). 

North  Carolina:  Corporation  Commission  (Pell's  Ee- 
visal  1908,  §§  1054-1056,  1060,  2754). 

North  Dakota:    Board  of  Eailroad  Commissioners  of  the 


Regulation  by  the  States  169 

State  of  North  Dakota  (Constitution,  §  82;  Eev.  Codes 
1905,  §§  364,  366,  367.    Laws  1909,  chap.  216,  §  4). 

Ohio:  Public  Utilities  Commission  of  Ohio  (Laws  1911, 
No.  325.  Laws  1913,  House  Bill  No.  582). 

Oklahoma:  Corporation  Commission  (Constitution,  Art. 
IX,  §§  15,  16,  18 (a).  Constitution  Schedule,  §  15). 

Oregon:  Eailroad  Commission  of  Oregon  (Gen.  Laws 
1907,  chap.  53.  Gen.  Laws  1911,  chap.  279). 

Pennsylvania:  Public  Service  Commission  of  the  Com- 
monwealth of  Pennsylvania  (Laws  1913,  No.  854). 

Rhode  Island:  Public  Utilities  Commission  (Acts  1912, 
chap.  795). 

South  Carolina:  Eailroad  Commission  (Constitution, 
Art.  IX,  §14.  Gen.  Sts.  1902,  §§2063,  2064.  Laws 
1893,  No.  304,  §  1.  Laws  1910,  No.  286). 

South  Dakota:  Board  of  Eailroad  Commissioners  of  the 
State  of  South  Dakota  (Eev.  Pol.  Code  1903,  §§186, 
187,  189-191,  194,  195— as  amended  by  Session  Laws 
1907,  chap.  208). 

Tennessee:  Eailroad  Commission  of  the  State  of  Ten- 
nessee (Acts  1897,  chap.  10.  Acts  1907,  chap.  390). 

Texas:  Eailroad  Commission  of  Texas  (Constitution, 
Art.  XVI,  §  30.  Sayles'  Civil  Statutes  1897,  Art.  4561). 

Vermont:  Public  Service  Commission  (Pub.  Sts.  1906, 
§§  4591,  4592,  6172.  Laws  1908,  No.  116). 

Virginia:  State  Corporation  Commission  (Constitution, 
§155). 

Washington:  Public  Service  Commission  of  Washington 
(Laws  1911,  chap.  117). 

West  Virginia:  Public  Service  Commission  (Public 
Service  Commission  Law  of  February  20,  1913). 

Wisconsin:  Eailroad  Commission  of  Wisconsin  (Laws 
1905,  chap.  362  as  amended.  Laws  1907,  chap.  499  as 
amended,  454,  578.  Laws  1911,  chap.  593.  Laws  1913, 
chap.  756). 


170  Railway  Regulation 

TEST  QUESTIONS 

1.  Why  wag  there  little  or  no  regulation  of  public  utilities 
in  the  early  days? 

2.  Indicate    the    chief    methods   of    state    regulation    and 
explain  the  distinctive  characteristics  of  each. 

3.  Why  must  the  success  of  commission  regulation  depend 
largely  upon  the  personnel  of  the  commissions? 

4.  What  circumstances  affect  the  appointment  of  railroad 
and  public  service  commissioners'/ 

5.  State  briefly  the  general  tendencies  which  prevail  in  the 
method  of  selection  of  commissioners,  their  compensation,  the 
number  of  commissioners,  and  the  length  of  their  term  of  office. 

6.  What  provisions  are  usually  found  in  regard  to  subor- 
dinate officials  and  administrative  staffs? 

7.  Indicate  the  character  of  the  qualifications  for  member- 
ship in  a  railroad  or  public  utilities  commission  which  are  gen- 
erally prescribed  by  statute.     What  are  the  usual  disqualifi- 
cations ? 

8.  In  what  way  are  the  rules  of  procedure  and  practice 
before  the  commissions  usually  determined? 

9.  From  what  three  view  points  may  extent  of  commission 
authority  be  examined? 

10.  What   two    types   of   regulating   boards   are    found   in 
America  ?  Which  is  the  prevailing  type  today  ? 

11.  What  are  the  objects  of  franchise  regulation?     In  what 
way  are  these  objects  attained  through  certificates  of  conven- 
ience and  necessity,  and  the  indeterminate  franchise? 

12.  What  are  the  purposes  of  state  regulation  of  security 
issues  ?    In  what  states  are  the  most  effective  systems  of  financial 
regulation  to  be  found? 

13.  What  are  the  general  provisions  of  commission  laws  as 
to  the  authority  given  to  the  commission  in  the  adjustment  of 
rates? 

14.  Explain  the  function  of  valuation  provisions  in  the  regu- 
lation of  rates  and  service. 

15.  What  is  meant  by  the  term  ''sliding  scale"  in  connection 
with  reasonable  rates?    Explain  the  principles  involved  in  the 
sliding  scale,  and  state  to  what  utilities  the  sliding  scale  is 
usually  made  applicable. 

16.  Indicate  the  general  character  of  the  provisions  against 
discrimination  in  rates  ai;d  service,  the  requirements  of  rate 


Regulation  by  the  States  171 

publicity,  and  the  rules  for  the  establishment  and  change  of 
rates.    Show  the  relationship  between  these  provisions. 

17.  Compare  the  extent  of  commission  authority  in  the  estab- 
lishment and  change  of  rates  with  the  scope  of  administrative 
power  over  the  adequacy  and  safety  of  service. 

18.  Why  is  the  regulation  of  accounts  and  reports  necessary 
to  an  adequate  control  of  capitalization,  rates,  and  service? 

19.  State  the  important  accounting  provisions  and  those  per- 
taining to  reports  and  statistics  which  are  generally  found  in 
state  commission  legislation. 


CHAPTER  IX 

THE  CONFLICT  BETWEEN  STATE  AND  FEDERAL 
AUTHORITY 

In  regulating  interstate  utilities,  and  particularly  in 
the  regulation  of  railways,  the  states  have  come  into 
conflict  with  the  authority  of  the  federal  government. 
This  conflict  in  jurisdiction  is  but  part  of  the  larger 
question  of  the  general  distribution  of  governmental 
power  between  the  nation  and  the  states  under  our  con- 
stitutional system,  which  presents  one  of  the  largest  and 
most  important  problems  in  the  development  of  Ameri- 
can constitutional  law.  In  this  place  it  will  be  treated 
very  briefly. 

DISTRIBUTION  OF  POWER  BETWEEN  THE  NATION 
AND  THE  STATES 

In  addition  to  the  limitations  upon  national  and  state 
action  which  we  have  already  considered,1  resulting  from 
the  provisions  of  the  Fifth2  and  Fourteenth3  Amend- 
ments to  the  Federal  Constitution,  it  is  provided  in  the 
fundamental  law  of  the  land  that  Congress  shall  have 
power  "to  regulate  commerce  with  foreign  nations  and 
among  the  several  states,"4  and  that  "the  powers  not 

1  See  supra,  pp.   95-110. 

2  ' '  No  person   shall      ...      be   deprived   of  life,  liberty,   or  prop- 
erty, without  due  process  of  law;  nor  shall  private  property  be  taken  for 
public  use  without  just  compensation." 

3  "  .      .      .     nor  shall  any  state  deprive  any  person  of  life,  liberty,  or 
property,  without  due  process  of  law,  nor  deny  to  any  person  within  it» 
jurisdiction  the  equal  protection  of  the  laws." 

*  Article  I,  Section  8. 

172 


State  versus  Federal  Authority  173 

delegated  to  the  United  States,  by  the  Constitution,  nor 
prohibited  by  it  to  the  states,  are  reserved  to  the  states 
respectively,  or  to  the  people. ' ' 5  These  provisions  seem 
to  indicate  clearly  the  respective  spheres  of  state  and 
national  action.  The  binding  force  of  this  distribution 
of  power  is  further  emphasized  by  the  clause  providing 
that  the  '  *  Constitution,  and  the  laws  of  the  United  States 
which  shall  be  made  in  pursuance  thereof  .  .  .  shall 
be  the  supreme  law  of  the  land,  and  the  judges  in  every 
state  shall  be  bound  thereby,  anything  in  the  Constitu- 
tion or  laws  of  any  state  to  the  contrary  notwithstand- 
ing. "6 

Under  these  provisions,  then,  Congress  may  exercise 
only  such  powers  as  are  specifically  delegated  to  it;  and 
all  powers  not  expressly  delegated  to  Congress  or  pro- 
hibited to  the  states  may  be  exercised  by  the  state  legis- 
latures. Moreover,  within  the  sphere  of  its  delegated 
powers  Congress  is  supreme,  and  its  enactments  pre- 
vail over  all  administrative  and  legislative  acts  of  the 
states  touching  upon  the  same  subject-matter.  This  sov- 
ereignty of  the  national  government,  to  use  the  words 
of  Chief  Justice  Marshall,  "though  limited  to  specified 
objects,  is  plenary  as  to  those  objects."7  In  the  regu- 
lation of  railways,  therefore,  exclusive  power  over  inter- 
state traffic — that  is,  the  transportation  of  persons  or 
the  carriage  of  goods  in  the  course  of  which  state  lines 
are  crossed — is  vested  in  the  federal  government,  acting 
through  Congress  or  the  Interstate  Commerce  Commis- 
sion; and  full  power  over  intrastate  commerce — that  is, 
the  transportation  of  persons  or  the  carriage  of  goods 

s  Tenth  Amendment. 

e  Article  VI,  Paragraph  2. 

7  Gibbons  v.  Ogden,  9  Wheat.  (U.  S.)  1. 


174  Railway  Regulation 

which  begins  and  ends  within  the  borders  of  a  single 
state — is  vested  in  the  states,  acting  through  their  legis- 
latures or  railroad  and  public  service  commissions. 

INTRASTATE  AND  INTERSTATE  COMMERCE 

It  is  very  difficult,  however,  if  not  impossible,  to  make 
a  distinct  separation,  for  purposes  of  government 
regulation,  between  intrastate  and  interstate  commerce. 
American  railways  almost  uniformly  carry  both  intra- 
state and  interstate  traffic.  State  boundaries  are  but 
artificial  political  lines  and  do  not  coincide  with  the 
natural  channels  of  trade  and  industry.  In  the  last 
quarter  of  a  century,  moreover,  the  growth  of  national 
or  interstate  business  has  far  outstripped  the  develop- 
ment of  local  or  intrastate  business;  and  the  conditions 
of  intrastate  and  interstate  commerce  have  become 
inextricably  interwoven.  The  adjustment  of  intrastate 
rates,  therefore,  has  come  to  exert  a  constantly  increas- 
ing influence  upon  the  development  of  the  interstate  rate 
structure.  In  part,  this  result  has  been  indirect  and 
inevitable,  arising  from  the  very  close  relationship  which 
naturally  subsists  between  local  and  interstate  traffic; 
but  in  large  measure  it  has  been  direct  and  purposeful, 
arising  from  the  desire  of  individual  states  to  secure 
through  special  regulations  commercial  advantages  for 
themselves  at  the  expense  of  neighboring  states  and  the 
general  trend  of  interstate  commerce.  In  a  very  real 
sense,  therefore,  the  states  may  be  said  to  make  interstate 
rates.8  As  a  result,  the  problem  of  how  far,  in  the  con- 
trol of  railway  rates,  the  supervision  by  the  states  of 

s Robert  Mather,  "How  the  States  Make  Interstate  Kates,"  Annals  of 
the  American  Academy  of  Political  and  Social  Science,  1908.  Eeprinted  in 
W.  Z.  Kipley,  Railway  Problems,  revised  edition,  530. 


State  versus  Federal  Authority  175 

their  internal  commerce  has  served  to  regulate  and  bur- 
den interstate  commerce,  has  come  to  be  one  of  the 
important  and  acute  questions  before  the  Supreme  Court 
of  the  United  States.  The  commerce  clause  of  the  Con- 
stitution has  had  to  be  re-interpreted  in  the  light  of 
modern  conditions  and  recent  practices,  and  the  scope 
of  federal  authority  over  intrastate  rates  has  had  to  be 
re-formulated. 

JUDICIAL,  INTERPRETATION  OF  THE  COMMERCE  CLAUSE 

The  present-day  judicial  interpretation  of  the  com- 
merce clause  of  the  Constitution  is  the  result  of  more 
than  a  century  of  development.  Its  virile  roots  are  to 
be  found  in  the  famous  opinion  of  Chief  Justice  Marshall 
in  Gibbons  v.  Ogden,9  decided  in  1824.  In  the  course  of 
this  century  of  growth,  the  American  nation  has  secured 
internal  unity  and  has  achieved  external  expansion. 
Social,  political,  and  economic  changes  of  a  revolu- 
tionary character  have  been  gradually  absorbed  by 
the  vigorous  spirit  of  our  national  life.  These  chang- 
ing conditions  have  brought  changing  interpretations 
of  the  distribution  of  governmental  power  between  the 
nation  and  the  states,  each  new  application  being 
grounded  in  the  underlying  principles  of  our  constitu- 
tional law  and  presenting  a  continuous  process  of  devel- 
opment. 

To  trace  in  detail  the  course  of  this  development,  even 
if  the  analysis  were  limited  to  the  problem  of  railway 
regulation,  is  beyond  the  scope  of  this  text.  It  will  be 
profitable,  however,  to  quote  the  conclusions  from  a  re- 

»  9  Wheat.  (U.  S.)  1. 


176  Railway  Regulation 

cent  excellent  survey  of  the  evolution  of  federal  regula- 
tion of  intrastate  rates : 10 

The  evolution  of  federal  regulation  of  intrastate  rates  is 
properly  to  be  traced  by  dividing  the  decisions  construing  the 
power  of  Congress  over  interstate  commerce  into  five  periods, 
each  of  which  is  more  or  less  distinctly  defined  by  reason  of 
particular  interpretations  placed  upon  the  commerce  clause. 

The  first  period  dates  from  the  adoption  of  the  Constitution  in 
1789  to  1829.  This  period  is  noteworthy  in  that  it  evolved  these 
two  basic  principles:  First,  that  the  actual  regulation  of  inter- 
state commerce  by  Congress  excludes  its  regulation  by  the  states. 
Second,  that  the  power  to  regulate  purely  internal  commerce 
rests  exclusively  with  the  states  regardless  of  whether  they 
actually  exercise  this  power  or  not.  This  period  will  be  called 
the  Constructive  Period. 

The  second  period  dates  from  1829  to  1876,  the  year  of  the 
so-called  Granger  Cases.  This  period  is  noteworthy  in  that  in 
addition  to  upholding  the  two  basic  principles  of  the  first  period, 
it  gradually  evolved,  although  not  without  great  controversy,  a 
third  basic  principle,  namely,  that  in  matters  essentially  national 
in  their  nature  and  requiring  uniformity  of  regulation  the  ex- 
clusiveness  of  congressional  power  is  not  dependent  upon  actual 
exercise  of  that  power,  but  arises  from  the  very  grant  itself 
of  the  power ;  while  in  matters  which,  though  affecting  interstate 
commerce,  are  primarily  of  local  interest,  the  power  of  the  states 
to  regulate  is  plenary  in  the  absence  of  congressional  action. 
This  latter  power  is  generally,  though  it  would  seem  rather 
inaccurately,  described  as  concurrent.  The  use  of  the  word 
"concurrent"  rather  conveys  the  idea  of  simultaneous  operation 
of  the  state  and  the  federal  power,  whereas  the  one  operates 
only  when  the  other  is  not  exercised.  From  the  fact  that  the 
state  power  is  dominated  by,  and  must  give  way  to,  the  federal 
power  when  exercised,  it  would  seem  perhaps  more  accurate  to 

10  William  C.  Coleman,  ''The  Evolution  of  Federal  Eegulation  of 
Intrastate  Bates:  The  Shreveport  Rate  Cases,"  Harvard  Law  Review, 
XXVIII,  (November,  1914). 


State  versus  Federal  Authority  177 

speak  of  the  one  power  as  dominant  and  of  the  other  as  servient, 
This  second  period  will  be  called  the  States'  Rights  Period. 

The  third  period,  one  of  only  ten  years,  dates  from  1876  to 
1886,  the  year  of  the  decision  in  the  case  of  Wabash,  St.  L.  & 
P.  Ry.  Co.  v.  Illinois.11  The  decisions  of  this  period  are  note- 
worthy in  that  they  further  extend  the  principle  of  so-called 
" concurrent"  power  to  the  point  of  saying  that  until  Congress 
acts  the  states  themselves  may  even  regulate  matters  essentially 
national  in  their  nature,  namely,  interstate  rates,  as  well  as  those 
matters  primarily  of  local  interest.  This  period  will  be  called 
the  Extreme  States'  Rights  Period. 

The  fourth  period  dates  from  1886  down  to,  but  not  including, 
the  so-called  Minnesota  Rate  Cases12  decided  in  1913.  During 
this  period  the  decisions  affirm  the  three  principles  enunciated  in 
the  first  and  second  periods,  and  repudiate  the  Extreme  States' 
Rights  principle  of  the  third  period.  This  fourth  period  will  be 
called  the  Federalistic  Period. 

The  fifth  and  last  period  dates  from  the  decision  rendered 
in  1913  in  the  Minnesota  Rate  Cases  to  the  present  time,  and 
therefore  includes  the  decision  in  the  Shreveport  Rate  Cases13 
rendered  last  June.14  This  period  is  noteworthy  for  the  further 
and  hitherto  unknown  restriction  of  state  power.  A  principle 
never  before  announced  is  now  evolved  to  the  effect  that  state 
regulation  of  local  rates  is  exclusive  only  until  Congress  acts, 
or,  in  other  words,  that  the  power  of  the  state  is  servient  not 
only  in  local  matters  affecting  interstate  commerce,  but  in  the 
regulation  of  its  own  internal  commerce  as  well.  In  short,  it 
does  not  allow  the  corresponding  usurpation  of  the  federal  gov- 
ernment that  was  allowed  to  the  states  during  the  third  or  Ex- 
treme States'  Rights  Period,  that  is,  regulation  of  intrastate 
rates  until  the  states  themselves  regulate  them,  for  of  course 
that  would  be  valueless;  but  it  goes  further  and  proclaims  that 

11 118  U.  S.  557. 
12  230  U.  S.  352. 
is  234  U.  S.  342. 
i*  That  is,  in  June,  1914. 


178  Railway  Regulation 

there  may  be  regulation  of  intrastate  rates  by  Congress  to  the 
exclusion  of  state  regulation  whenever  Congress  may  see  fit  to 
act.  In  addition,  with  the  Interstate  Commerce  Commission,  an 
agent  of  Congress,  be  it  noted,  is  primarily  vested  the  determina- 
tion of  this  fundamental  constitutional  question,  namely,  whether 
state  action  is  to  be  excluded,  or,  in  short,  whether  the  com- 
merce clause  has  been  violated.  This  last  period  will  be  called 
the  Period  of  Judicial  Amendment,  so  radical  is  it  in  its  extension 
of  the  doctrine  of  national  supremacy.15 

FEDERAL  CONTROL  OVER  INTRASTATE  RATES 

The  Minnesota  Bate  Case  and  the  Shreveport  Case 
are  the  two  important  decisions  from  which  the  present 
status  of  the  law  may  be  derived.  In  these  cases  the 
extent  of  national  control  over  local  railway  rates  is 
judicially  determined.  In  order  that  the  problem  in- 
volved in  the  conflict  between  state  and  federal  author- 
ity in  the  regulation  of  railway  rates  and  the  existing 
attitude  of  the  courts  in  the  solution  of  the  problem  may 
be  presented  concretely,  it  will  be  useful  to  consider 
briefly  the  issues  and  results  of  these  cases. 

THE    MINNESOTA   RATE    CASE 

The  main  facts  in  the  Minnesota  Bate  Case,  decided 
in  1913,  have  been  stated  in  an  earlier  chapter.16  The 
stockholders  of  the  Northern  Pacific  Railway  Company, 
the  Great  Northern  Railway  Company,  and  the  Minne- 
apolis &  St.  Louis  Railroad  Company  brought  suit  to  re- 
strain the  enforcement  of  certain  acts  of  the  Minnesota 
legislature  and  of  certain  orders  of  the  Minnesota  Rail- 
road and  Warehouse  Commission,  issued  in  1905  and 

is  Harvard  Law  Review,  XXVIII,  36-38. 
16  See  supra,  pp.  107-110. 


State  versus  Federal  Authority  179 

1906,  whereby  substantial  reductions  in  freight  and  pas- 
senger rates  were  made.  The  chief  grounds  of  com- 
plaint were :  first,  that  the  newly  established  rates  were 
confiscatory,  which  claim,  as  we  have  seen,  was  partly 
upheld  and  partly  denied  by  the  Supreme  Court;  and 
second,  that  these  rates  were  unlawfully  imposed  be- 
cause they  amounted  to  an  unconstitutional  interference 
with  interstate  commerce. 

The  basis  of  this  denial  of  jurisdiction  to  the  state 
of  Minnesota  and  its  commission  was  the  claim,  sub- 
stantiated by  a  large  mass  of  evidence,  that  these  intra- 
state  rates  indirectly  determined  the  level  of  interstate 
rates  and  thereby  burdened  interstate  commerce.  Al- 
though the  acts  of  the  legislature  and  the  orders  of  the 
commission,  by  their  terms,  applied  solely  to  the  inter- 
nal commerce  of  the  state  of  Minnesota,  the  inevitable 
effect  of  the  new  rate  adjustment  was  to  impose  an  unlaw- 
ful burden  upon  interstate  commerce  by  creating  un- 
just discriminations  between  localities  in  Minnesota  and 
those  in  adjoining  states.  In  fact,  when  the  compulsory 
reduction  in  intrastate  rates  was  put  into  force,  the 
railroads  involved  reduced  proportionately  the  inter- 
state rates  to  nearby  localities  in  adjoining  states,  in 
order  to  prevent  discrimination  against  these  localities 
and  the  loss  of  business  that  would  doubtless  ensue. 
The  court's  summary  of  part  of  the  evidence  will  indi- 
cate its  unanswerable  strength  from  the  purely  economic 
standpoint : 

The  state  line  of  Minnesota  on  the  east  and  west  runs  between 
cities  which  are  in  close  proximity.  Superior,  Wis.,  and  Duluth, 
Minn.,  are  side  by  side  at  the  extremity  of  Lake  Superior.  Op- 
posite one  another,  on  the  western  boundary  of  the  state,  lie 
Grand  Forks,  N.  D.,  and  East  Grand  Forks,  Minn. ;  Fargo,  N.  D., 
and  Moorehead,  Minn. ;  and  Wahpeton,  N.  D.,  and  Breckenridge, 


180  Railway  Regulation 

Minn.  The  cities  in  each  pair  ship  and  receive,  to  and  from  the 
same  localities,  the  same  kinds  of  freight.  The  railroad  com- 
panies have  always  put  each  on  a  parity  with  the  other  in  the 
matter  of  rates,  and  if  there  were  a  substantial  difference  it 
would  cause  serious  injury  to  the  commerce  of  the  city  having 
the  higher  rate.  If  the  Northern  Pacific  Company  failed  to  main- 
tain as  low  rates  on  traffic  in  and  out  of  Superior  as  on  that  to 
and  from  DuLuth,  its  power  to  transact  interstate  business 
between  Superior  and  points  in  Minnesota  would  be  seriously 
impaired,  and  the  value  of  its  property  in  Superior  would  be 
depreciated. 

The  maximum  class  rates  fixed  by  the  order  of  September  6, 
1906,  were  from  20  per  cent  to  25  per  cent  lower  than  those  there- 
tofore maintained  by  the  Northern  Pacific  and  Great  Northern 
companies  for  transportation  in  Wisconsin,  Minnesota,  and  North 
Dakota,  whether  such  transportation  was  local  to  one  of  these 
states  or  was  interstate  between  any  two  of  them.  When  the 
Northern  Pacific  Company,  pursuant  to  this  order,  installed  the 
new  intrastate  rates,  it  reduced  its  interstate  rates  between 
Superior  and  points  in  Minnesota  to  an  exact  parity  with  its 
rates  from  Duluth.  Eeduction  was  also  made  in  the  rates  be- 
tween both  Duluth  and  Superior  and  the  above-mentioned 
points  on  the  western  boundary,  so  as  to  put  the  border  cities 
in  North  Dakota  on  an  equal  basis  with  the  neighboring  cities 
in  Minnesota.  This  reduction  was  substantial;  and,  had  it  not 
been  made,  the  places  adjoining  the  boundary,  but  outside  the 
state,  could  not  have  competed  with  those  within.  Although  the 
Northern  Pacific  Company  thereby  suffered  a  substantial  loss  in 
revenue  from  its  interstate  business,  it  had  the  choice  of  sub- 
mitting to  that  loss  or  suffering  substantial  destruction  of  its 
interstate  commerce  to  these  border  localities  in  articles  covered 
by  the  orders. 

In  view  of  these  and  similar  facts,  the  lower  federal 
court  declared  the  acts  of  the  Minnesota  legislature 
and  the  orders  of  the  Minnesota  commission  to  be  un- 
constitutional, on  the  ground,  first,  that  the  action  of 


State  versus  Federal  Authority  181 

the  state  of  Minnesota  imposed  a  direct  burden  upon 
interstate  commerce,  and,  second,  that  it  conflicted  with 
the  provisions  of  the  Act  to  Eegulate  Commerce.  The 
Supreme  Court  overruled  the  decision  of  the  lower  court, 
denying  both  these  contentions,  and  upheld  the  validity 
of  the  state  action  in  ordering  a  reduction  of  rates. 
There  was  no  direct  regulation  of  interstate  commerce, 
the  Supreme  Court  held,  because  the  new  rates  were 
specifically  applicable  only  to  the  internal  commerce  of 
the  state  of  Minnesota;  and  there  was  no  conflict  with 
the  provisions  of  the  Act  to  Eegulate  Commerce,  because 
purely  intrastate  traffic  was  expressly  excepted  from 
the  operation  of  the  Act.17 

The  Supreme  Court  did  recognize,  however,  that 
"new  physical  conditions  had  produced  the  anomaly  of 
a  double  action  of  legislative  powers  upon  business  which 
is,  and  which  should  be,  economically  speaking,  a  unit 
and  under  the  control  of  one  body,  the  national  gov- 
ernment. They  (the  Justices  of  the  Supreme  Court) 
appreciated  the  gravity  of  the  situation,  and  saw  that 
some  measure  was  unquestionably  needed  to  relieve  the 
business  of  transportation  from  the  confusing  and  de- 
structive dominance  and  jealousies  of  numerous  state 
commissions,  whereby  effective  authority  on  the  part 
of  the  Interstate  Commerce  Commission  was  vitiated/' 18 
Accordingly,  the  court  declared  unanimously  that  state 
regulation  of  intra-state  rates,  if  it  did  burden  inter- 
state commerce  even  indirectly,  was  not  necessarily 


if  Provided,  however,  That  the  provisions  of  this  Act  shall  not  apply  to 
the  transportation  of  passengers  or  property,  or  to  the  receiving,  delivering, 
storage,  or  handling  of  property  wholly  within  one  state  and  not  shipped 
to  or  from  a  foreign  country,  from  or  to  any  state  or  territory  as  afore- 
said."— Sec.  1. 

is  Harvard  Law  Eeview,  XXVIII,  64. 


182  Hallway  Regulation 

supreme,  state  action  being  lawful  and  conclusive  only 
in  the  absence  of  congressional  action.  The  Minnesota 
rates  were  binding  in  this  particular  case  because  the 
federal  government  had  taken  no  action  with  regard  to 
them,  either  through  Congress  or  through  the  Interstate 
Commerce  Commission.  In  other  words,  the  national 
power  was  declared  to  be  dominant  even  over  intrastate 
rates,  in  so  far  as  they  affect  interstate  commerce,  pro- 
vided Congress  sees  fit  to  exercise  such  power.  While 
the  validity  of  the  acts  and  orders  was  upheld,  it  was 
explicitly  suggested  that  the  needed  supremacy  of  fed- 
eral authority  could  be  lawfully  secured  through  further 
legislation  amending  the  Act  to  Eegulate  Commerce. 
Justice  Hughes  said: 

If  the  situation  becomes  such,  by  reason  of  the  interblending 
of  the  interstate  and  intrastate  operations  of  interstate  carriers, 
that  adequate  regulation  of  their  interstate  rates  cannot  be 
maintained  without  imposing  requirements  with  respect  to  their 
intrastate  rates  which  substantially  affect  the  former,  it  is  for 
Congress  to  determine,  within  the  limits  of  its  constitutional 
authority  over  interstate  commerce  and  its  instruments,  the 
measure  of  the  regulation  it  should  apply.  It  is  the  function  of 
this  court  to  interpret  and  apply  the  law  already  enacted,  but 
not  under  the  guise  of  construction  to  provide  a  more  compre- 
hensive scheme  of  regulation  than  Congress  has  decided  upon. 
Nor,  in  the  absence  of  federal  action,  may  we  deny  effect  to  the 
laws  of  the  state  enacted  within  the  field  which  it  is  entitled 
to  occupy  until  its  authority  is  limited  through  the  exertion  by 
Congress  of  its  paramount  constitutional  power.19 

The  Minnesota  Rate  Case,  then,  paved  the  way  for 
national  supremacy  in  the  conflict  between  state  and  fed- 
eral authority,  by  suggesting  the  expedient  of  further 
legislation,  declared  to  be  constitutionally  possible  under 

19  230  U.  S.  432,  433. 


State  versus  Federal  Authority  183 

the  existing  distribution  of  power  between  the  nation 
and  the  states.  In  the  Shreveport  Case  this  end  was 
accomplished  without  additional  legislation. 

THE    SHREVEPORT    CASE 

Complaint  was  brought  before  the  Interstate  Com- 
merce Commission  in  1911,  through  the  Railroad 
Commission  of  Louisiana,  against  the  Texas  &  Pacific 
Railway  Company,  the  Houston  East  &  West  Texas  Rail- 
way Company,  and  other  carriers,  on  the  ground  that 
these  railways  made  rates  from  Dallas,  Houston,  and 
other  Texas  points,  to  places  in  eastern  Texas,  which 
were  unduly  low  as  compared  with  the  rates  from  Shreve- 
port, La.,  to  these  same  points  in  Texas,  and  were  there- 
fore discriminatory  with  reference  to  Shreveport. 

Shreveport  is  231  miles  from  Houston  and  189  miles 
from  Dallas,  in  Texas,  being  about  40  miles  east  of  the 
Texas  boundary.  All  three  places  are  competitors  for 
the  business  of  intermediate  localities  in  eastern  Texas. 
The  rates  eastward  from  Houston  and  Dallas  were  sub- 
stantially lower  than  the  rates  westward  from  Shreve- 
port, resulting  in  serious  commercial  disadvantage  to 
the  interests  of  Shreveport.  These  rates  on  intrastate 
traffic  in  Texas  had  been  fixed  by  the  Texas  Railroad 
Commission  with  the  avowed  purpose  of  securing  spe- 
cial advantages  for  its  state  traffic  at  the  expense  of 
neighboring  localities. 

The  Interstate  Commerce  Commission,  in  its  deci- 
sion,20 established  class  rates  from  Shreveport  to  cer- 
tain places  in  Texas  substantially  on  the  same  level  as 
the  intrastate  Texas  rates,  with  which  order  as  to  in- 

20  Meredith  et  al.,  constituting  the  Railroad  Commiision  of  Louisiana 
v.  St.  L.  S.  W.  Ry.  Co.  et  al.,  23  I.  C.  C.  Rep.  31. 


184  Railway  Regulation 

terstate  rates  the  railways  concerned  readily  complied; 
and  it  declared  the  commodity  rates  which  the  Texas 
Eailroad  Commission  had  ordered  from  Houston  and 
Dallas  to  certain  Texas  points,  which  were  substantially 
lower  than  those  prevailing  from  Shreveport  to  the  same 
localities,  to  constitute  unjust  discrimination  against 
Shreveport.  The  railways  refused  to  comply  with  this 
order  as  to  the  commodity  rates  on  the  ground  that  it 
was  beyond  the  scope  of  the  power  of  the  Interstate 
Commerce  Commission  to  question  the  validity  of  intra- 
state  rates  that  had  been  fixed  by  a  state  railroad  com- 
mission. On  appeal  to  the  Commerce  Court,  the  order 
of  the  Interstate  Commerce  Commission  was  upheld.21 
The  case  was  then  appealed  to  the  Supreme  Court  of 
the  United  States,  and  the  order  of  the  Commission  was 
attacked:  first,  on  the  ground  that  it  was  beyond  the 
scope  of  federal  authority  to  regulate  intrastate  rates; 
and,  second,  on  the  ground  that  the  Interstate  Commerce 
Commission  was  not  vested  with  such  authority,  even  if 
Congress  possessed  the  power  to  regulate  intrastate 
rates  which  indirectly  burden  interstate  commerce. 

The  Supreme  Court  denied  the  validity  of  both  of 
these  contentions,  upholding  the  order  of  the  Interstate 
Commerce  Commission  and  the  decision  of  the  Com- 
merce Court.  That  the  federal  government  possessed 
the  power  of  control  over  intrastate  rates  which  indi- 
rectly regulate  interstate  commerce,  had  been  amply 
established  in  the  Minnesota  Bate  Case.  The  important 
issue  in  the  Shreveport  Case  was  whether  this  authority 
had  been  exercised  by  Congress — in  other  words,  whether 

21  T.  &  P.  Ry.  Co.  v.  U.  S.  (I.  C.  C.  et  al.,  Intervenes),  205  Fed.  380 
(1913) ;  E.  &  W.  Texas  By.  Co.  et  al.  v.  U.  S.  (I.  C.  C.  et  al.,  Interveners), 
205  Fed.  391  (1913). 


State  versus  Federal  Authority  185 

the  Interstate  Commerce  Commission  was  clothed  with 
sufficient  power  to  overrule  the  order  of  a  state  railroad 
commission  prescribing  maximum  freight  rates  on  intra- 
state  traffic. 

The  Supreme  Court  found  that  such  power  did  reside 
in  the  Interstate  Commerce  Commission,  in  spite  of  the 
proviso  in  the  first  section  of  the  Act  to  Regulate  Com- 
merce expressly  excepting  intrastate  traffic  from  the 
operation  of  the  law.  The  Commission  derived  this  au- 
thority from  its  power  to  prevent  discrimination  between 
localities,  in  accordance  with  the  provision  of  the  third 
section  of  the  Act.  That  there  was  discrimination  against 
Shreveport,  as  there  had  been  against  localities  adjoin- 
ing the  east  and  west  boundaries  of  Minnesota,  cannot 
be  questioned.  That  this  discrimination  resulted  from 
the  lawful  adjustment  of  intrastate  rates  was  held  to  be 
immaterial.  The  power  of  Congress  over  interstate  com- 
merce is  plenary  and  supreme.  Congress  vested  in  the 
Interstate  Commerce  Commission  full  authority  to  pre- 
vent unjust  discrimination  between  localities.  This  au- 
thority may  be  exercised  by  the  Commission  whether  the 
discriminations  result  from  the  relationship  between 
intrastate  rates,  prescribed  by  state  commissions,  and 
interstate  rates,  established  by  federal  order,  or  through 
the  voluntary  practices  of  railways  engaged  entirely  in 
interstate  commerce.  To  use  the  words  of  the  Court: 

We  are  not  unmindful  of  the  gravity  of  the  question  that  is 
presented  when  state  and  federal  views  conflict.  But  it  was 
recognized  at  the  beginning  that  the  nation  could  not  prosper  if 
interstate  and  foreign  trade  were  governed  by  many  masters, 
and,  where  the  interests  of  the  freedom  of  interstate  commerce 
are  involved,  the  judgment  of  Congress  and  of  the  agencies  it 
lawfully  establishes  must  control. 


186  Railway  Regulation 

THE  PBESENT  STATUS 

Under  the  compelling  stress  of  economic  conditions, 
after  a  notable  legal  struggle,  the  dominance  of  federal 
control  in  railway  regulation  seems  to  be  clearly  estab- 
lished. Justice  Hughes,  in  the  Shreveport  Case,  has 
tersely  indicated  the  broad  scope  of  the  national  power 
in  these  words: 

By  virtue  of  the  comprehensive  terms  of  the  grant,  the 
authority  of  Congress  is  at  all  times  adequate  to  meet  the  vary- 
ing exigencies  that  arise  and  to  protect  the  national  interest  by 
securing  the  freedom  of  interstate  commercial  intercourse  from 
local  control. 

It  is  not  unlikely,  therefore,  that  the  chief  future  use- 
fulness of  the  state  railroad  and  public  service  commis- 
sions will  be  found  in  connection  with  the  so-called  local 
or  municipal  utilities,  which  are  subject  to  no  control 
save  that  of  the  states  and  of  the  municipalities.  In 
these  local  utilities,  too,  the  need  of  centralization  is 
becoming  increasingly  felt,  and  state  commissions  are 
tending  to  dominate,  if  not  to  replace  entirely,  the  activi- 
ties of  municipal  boards.  In  railway  regulation  the  pre- 
vailingly national  character  of  American  commerce  and 
industry  obviously  necessitates  a  single  unified  control. 
By  recognizing  the  supremacy  of  the  federal  govern- 
ment, acting  through  the  Interstate  Commerce  Commis- 
sion, the  courts  are  gradually  harmonizing  legal  rules 
and  economic  needs  in  railway  regulation. 


State  versus  Federal  Authority  187 

TEST  QUESTIONS 

1.  Explain  the  limitations  upon  state  and  national  action 
imposed  by  the  Fifth  and  Fourteenth  Amendments  to  the  federal 
Constitution. 

2.  Distinguish  between  delegated  and  reserved  powers. 

3.  Under  what  provision  of  the  Constitution  was  the  Inter- 
state Commerce  Commission  established  by  Congress? 

4.  Distinguish  between  intrastate  and  interstate  commerce, 
and  show  the  close  relationship  existing  between  them. 

5.  Explain  the  basis  of  the  conflict  between  state  and  federal 
authority  in  the  regulation  of  railway  rates. 

6.  Trace  the  varying  judicial  interpretations  of  the  commerce 
clause,  and  show  their  bearing  upon  the  problem  of  railway 
regulation. 

7.  State  concisely  the  issues  and  results  in  the  Minnesota  Rate 
Case  and  in  the  Shreveport  Case.    What  is  the  important  dif- 
ference between  the  two  cases? 

8.  Explain  carefully  the  present  extent  of  federal  control 
over  intrastate  rates. 

9.  Under  what  section  of  the  Act  to  Regulate  Commerce  is 
the  federal  authority  over  intrastate  rates  exercised? 


CHAPTER  X 
FEDERAL  REGULATION  1 

THE  CAUSES  OF  FEDERAL,  REGULATION 

The  underlying  causes  of  federal  regulation  may  be 
found  in  the  general  trend  of  American  railway  develop- 
ment which  has  been  described  in  some  detail  in  one  of 
the  early  chapters  of  this  text.  More  specifically,  the 
rapid  growth  of  railway  mileage  and  the  development  of 
interstate  traffic  created  the  necessity  of  regulating  the 
railway  service  on  a  national  centralized  basis. 

Hardly  was  the  Granger  Movement  well  under  way 
when  suggestions  for  national  legislation  began  to  be 
heard.  Like  the  Granger  Movement  itself  these  sugges- 
tions sprang  from  the  belief  that  railway  rates  were 
excessively  high.  Some  agitation  followed,  especially  in 
the  middle  west,  where  a  need  was  felt  for  cheaper  rates 
to  the  Atlantic  seaboard,  and  an  investigation  by  a  com- 
mittee of  the  United  States  Senate  was  the  result.  The 
Windom  Committee  submitted  its  report  in  1874.2  While 
this  report  contained  much  valuable  material  on  the 

1  The  important  policies  and  principles  employed  by  the  Interstate  Com- 
merce Commission  in  the  regulation  of  railways  have  already  been  discussed 
in  connection  with  the  various  problems  treated  in  the  preceding  chapters. 
Moreover,  a  distinct  text  in  the  course  in  Interstate  Commerce  and  Eailway 
Traffic  is  devoted  to  a  consideration,  section  by  section,  of  the  Act  to  Kegu- 
late  Commerce  and  the  other  acts  amendatory  thereof  and  supplementary 
thereto.  In  this  place,  therefore,  there  is  presented,  in  outline,  a  general 
survey  of  federal  legislation,  with  a  brief  indication  of  its  purposes  and 
effects. 

243rd  Congress,  1st  Session,  Senate  Eeport  307. 

188 


Federal  Regulation  189 

American  railway  situation  at  that  time,  the  conclusions 
and  recommendations  of  the  committee  gave  evidence  of 
what  would  now  be  considered  immature  ideas  as  to  the 
root  of  the  railway  problem.  The  report  proceeded  on 
the  hypothesis  that  permanent  improvement  in  railway 
conditions  could  be  secured  only  through  the  stimulation 
of  competition,  and  hence  the  committee  recommended 
the  further  development  of  waterways  and  the  construc- 
tion of  additional  lines  between  the  middle  west  and  the 
Atlantic.  No  action  was  taken  by  Congress,  and  the 
natural  course  of  events  served  to  silence  the  complaints 
against  the  extortionate  character  of  railway  rates.3 

The  present  system  of  federal  regulation  was  the  direct 
outcome  of  the  report  of  the  Cullom  Committee  which 
was  submitted  to  the  United  States  Senate  in  1886.4  The 
crying  evil  at  this  time  was  the  wide  prevalence  of  dis- 
criminatory practices  and  not  the  unreasonableness  of 
railway  rates.  The  committee  declared  that  "the  para- 
mount evil  chargeable  against  the  operation  of  the  trans- 
portation systems  of  the  United  States,  as  now  conducted, 
is  unjust  discrimination  between  persons,  places,  com- 
modities, or  particular  descriptions  of  traffic."  The 
existence  of  personal  discrimination,  as  revealed  in  the 
then  current  Standard  Oil  Company  litigation,  was  espe- 
cially instrumental  in  arousing  public  sentiment  to  the 
need  of  federal  action. 

In  the  same  year,  too,  came  the  settlement  of  the 
Wabash  Case,5  in  which  the  Supreme  Court  held  that  the 

3  ' '  The  rate  wars  of  the  seventies ;  a  revival  of  general  prosperity  in 
1879;  and  great  mechanical  improvements  and  economies  in  operation,  had 
brought  about  the  desired  decline  of  freight  rates." — W.  Z.  Ripley,  Eail- 
roads:  Eates  and  Regulation,  444. 

4  49th  Congress,  1st  Session,  Senate  Report  46. 

5  W.  St.  L.  &  P.  Ry.  Co.  v.  Illinois,  118  U.  S.  557. 


190  Railway  Regulation 

jurisdiction  of  each  state  in  the  regulation  of  railways 
must  be  confined  to  intrastate  traffic  and  that  interstate 
commerce  must  remain  unregulated  until  Congress  should 
see  fit  to  act.  The  question  before  the  court  in  this  case 
was  the  validity  of  an  Illinois  statute  which  provided 
that  if  any  railroad  company  should  charge  or  receive 
the  same  or  a  greater  sum  for  the  transportation  of  pas- 
sengers or  freight  of  the  same  class  within  the  state  for 
any  distance  than  it  did  for  a  longer  distance  in  the  same 
direction,  the  practice  should  be  considered  unlawful  and 
the  company  should  be  liable  to  pay  a  penalty  for  unjust 
discrimination.  The  carrier  made  such  discrimination 
in  the  transportation  of  goods  from  Peoria  and  Oilman, 
in  Illinois,  to  New  York,  by  charging  a  higher  rate  for 
the  same  class  of  goods  carried  from  Oilman  than  from 
Peoria,  although  Oilman  was  eighty-six  miles  nearer  to 
New  York  city  than  Peoria,  l  i  this  difference  being  in  the 
length  of  the  lines  in  the  State  of  Illinois. ' '  The  court, 
in  declaring  the  statute  invalid  as  a  regulation  of  inter- 
state commerce,  said: 

We  must,  therefore,  hold  that  it  is  not,  and  never  has  been, 
the  deliberate  opinion  of  the  majority  of  this  court  that  a  statute 
of  a  state  which  attempts  to  regulate  the  fares  and  charges  by 
railroad  companies  within  its  limits,  for  a  transportation  which 
constitutes  a  part  of  commerce  among  the  states,  is  a  valid  law. 

The  Wabash  case  is  said  to  have  put  "the  match  to 
the  long  train  of  influences"  making  for  federal  action. 
Congress  approached  the  problem  of  railway  regulation 
with  greater  seriousness  than  it  had  done  in  1874,  and  in 
1887  the  Act  to  Kegulate  Commerce,  the  basis  and  main 
structure  of  our  system  of  governmental  control,  was 
enacted  into  law. 


Federal  Regulation  191 

ITS  GENERAL,  CHARACTER 

We  shall  see  that  the  federal  laws  upon  which  our 
system  of  regulation  is  based  embrace  a  great  variety  of 
rules  and  principles  and  provide  a  complex  machinery 
for  their  enforcement.  The  main  purposes  of  all  the 
legislation,  however,  may  be  reduced  to  two.  It  aims 
to  establish  reasonable  rates  and  to  prevent  discrimina- 
tory practices.  -All  the  provisions  of  the  various  acts 
are  intended  to  promote  one  or  another  of  these  purposes. 

In  addition  to  the  sections  bearing  directly  upon  rates 
and  discrimination,  the  provisions  consist  of  specific  sub- 
stantive rules,  such  as  those  dealing  with  rate  publicity 
or  accounting  practices,  compliance  with  which  tends  to 
make  more  certain  the  exaction  of  reasonable  rates  and 
the  elimination  of  preferential  treatment;  or  they  con- 
sist of  adjective  rules  indicating  the  practice  and  pro- 
cedure to  be  followed  by  the  Commission  and  the  courts 
in  the  enforcement  of  the  law. 

The  system  of  regulation  thus  established  aims  to 
achieve  its  purposes  through  administrative  control.  It 
recognizes  the  inadequacy  of  mere  judicial  enforcement 
of  the  common  law  duties  of  common  carriers  as  a  pro- 
tection for  the  public  interest.  Direct  legislative  regula- 
tion, too,  is  conceived  as  spasmodic  and  ineffective.  Bail- 
way  control  must  be  entrusted  to  experts  and  must  be 
continuous.  Its  purpose  is  to  establish  a  proper  rela- 
tionship between  railway  corporations  and  the  general 
public  and  not  merely  to  afford  adequate  remedies  to 
injured  passengers  or  shippers  as  individuals.  The 
essence  of  public  control,  then,  consists  in  the  provision 
of  just  and  fair  standards  of  conduct  for  the  future,  and 
this  can  be  accomplished  only  through  administrative 
commissions  clothed  with  ample  authority  to  make  spe- 


192  Railway  Regulation 

cific  orders  as  to  rates  and  service  and  to  enforce  prompt 
obedience  to  these  orders. 

It  is  to  be  noted,  however,  that  even  a  system  of  ad- 
ministrative regulation  does  not  dispense  entirely  with 
legislative  and  judicial  activity.  Administrative  com- 
missions are  limited  to  the  exercise  of  powers  expressly 
conferred  upon  them  or  naturally  incidental  to  the  per- 
formance of  their  public  duties.  The  source  of  commis- 
sion authority,  therefore,  resides  in  the  legislature,  and 
the  extent  of  that  authority  is  dependent  upon  legisla- 
tive action.  Moreover,  legislatures  frequently  pass  direct 
laws  for  the  regulation  of  railways  in  addition  to  the 
statutes  by  virtue  of  which  the  commissions  are  created 
and  the  general  system  of  control  is  established.  Thus, 
the  states  have  passed  numerous  maximum  rate  laws  and 
many  regulations  covering  details  of  train  operation,  car 
supply,  character  of  equipment  and  station  buildings, 
hours  of  labor,  and  conditions  of  employment,  and  set- 
ting up  standards  of  safety.  The  federal  government, 
too,  through  the  direct  action  of  Congress,  has  enacted 
special  statutes  dealing  with  safety  appliances,  reports 
of  accidents,  hours  of  service,  transportation  of  explo- 
sives, boiler  inspection,  block  signals,  and  the  like. 

The  courts  also  play  an  important  part  in  our  systems 
of  administrative  control,  state  and  national,  because 
they  are  called  upon  to  determine  the  validity  of  the  laws 
under  which  commissions  assume  to  act  and  to  restrain 
these  commissions  within  the  scope  of  the  authority 
lawfully  entrusted  to  them.  Within  the  limitations  im- 
posed by  law,  however,  our  commissions  tend  to  be 
supreme.  The  real  task  of  railway  regulation  is  now 
clearly  vested  in  the  Interstate  Commerce  Commission 
and  in  the  state  railway  and  public  service  commissions. 

The  details  of  state  regulation  were  described  and 


Federal  Regulation  193 

examined  in  a  preceding  chapter.  We  shall  now  trace, 
in  brief  outline,  the  important  details  of  our  system  of 
federal  regulation  as  it  has  developed  since  the  enact- 
ment of  the  Act  to  Regulate  Commerce  in  1887. 

THE  ACT  TO  REGULATE  COMMEKCE 
ORGANIZATION  AND  JURISDICTION  OF  COMMISSION 

The  Interstate  Commerce  Commission,  as  originally 
created,  was  composed  of  five  members,  appointed  by  the 
President,  for  regular  terms  of  six  years,  at  a  salary  of 
$7,500  for  each  of  the  commissioners,  with  a  provision 
for  the  employment  of  necessary  assistance.  The  prin- 
cipal office  of  the  Commission  was  to  be  located  in  Wash- 
ington, though  sessions  were  authorized  in  any  part  of 
the  United  States.  The  changes  in  the  organization  of 
the  Commission  introduced  by  the  Hepburn  amendments 
of  1906  may  also  be  here  noted.  The  membership  of  the 
Commission  was  increased  to  seven;  the  tenure  of  office 
was  lengthened  to  seven  years;  and  the  salaries  were 
raised  to  $10,000.6  On  this  basis  the  Interstate  Com- 
merce Commission  is  now  organized. 

In  defining  the  jurisdiction  of  the  Commission  the  Act 
was  made  to  apply  to  common  carriers  "engaged  in  the 
transportation  of  persons  or  property  wholly  by  rail- 
road, or  partly  by  railroad  and  partly  by  water,  when 
both  are  used  under  a  common  control,  management,  or 
arrangement. ' ' 7  Independent  water  lines  were  left  out- 
side the  scope  of  the  Act,  and  no  specific  mention  was 
made  of  such  carriers  as  express  companies,  sleeping  car 

6  Act  to  Regulate  Commerce,  amended  in  1906,  sees.  11,  18,  and  19. 

7  This  provision  of  the  original  Act  to  Regulate  Commerce,  together  with 
certain  provisions  of  the  Panama  Canal  Act  of  August  24,  1912,  constitute 


194  Railway  Regulation 

companies,  and  pipe  lines.  It  was  provided  that  the  term 
railroad  should  include  bridges  and  ferries.  The  trans- 
portation to  be  covered  was  defined  so  as  to  include  for- 
eign and  interstate  traffic,  and  the  carriage  of  persons  or 
goods  between  territories,  or  states  and  territories,  and 
the  District  of  Columbia.  Intraterritorial  commerce  was 
not  included  within  the  scope  of  the  Act,  and  intrastate 
traffic  was  specifically  excluded.8  By  the  Hepburn 
Amendments  of  1906  the  Act  was  made  to  apply  to  intra- 
territorial  traffic. 

BATE   REASONABLENESS 

The  Act  laid  down  the  general  principle,  declaratory 
of  the  common  law  and  found  in  practically  all  state 
statutes  then  in  effect,  that  all  rates  and  charges  must 
be  just  and  reasonable  and  that  every  unjust  and  unrea- 
sonable charge  is  prohibited  and  declared  to  be  unlawful. 
This  enunciation,  coupled  with  the  provision  that  the 
Commission  is  authorized  to  execute  and  enforce  the 
provisions  of  the  Act,  constituted  all  the  direct  rate- 
making  power  vested  in  the  Interstate  Commerce  Com- 
mission.9 

The  anti-pooling  section  was  doubtless  incorporated 
in  the  Act  as  an  indirect  means  of  preventing  excessive 
charges.  It  reflects  the  confused  ideas,  once  largely  prev- 

the  basis  of  the  Commission 's  authority  over  rail  and  water  transportation 
along  the  Great  Lakes  and  across  the  Panama  Canal.  For  a  consideration 
of  the  meaning  and  significance  of  the  phrase  "common  control,  manage- 
ment, or  arrangement, ' '  as  interpreted  by  the  Commission  and  the  courts, 
see  H.  C.  Lust,  The  Act  to  Regulate  Commerce  and  Supplemental  Acts,  9-13 ; 
for  an  analysis  and  discussion  of  the  provisions  of  the  Panama  Canal  Act, 
in  so  far  as  they  affect  the  jurisdiction  of  the  Interstate  Commerce  Com- 
mission, see  Ibid.,  65-67,  77-78. 

a  Sec.  1. 

s  Sees.  1,  12. 


Federal  Regulation  195 

alent  and  still  current  to  some  extent,  on  the  efficacy  of 
competition  as  a  solution  of  the  railroad  problem.  It 
provides  that  railways  are  forbidden  to  enter  into  "any 
contract,  agreement,  or  combination  with  any  other  com- 
mon carrier  or  carriers  for  the  pooling  of  freights  of 
different  and  competing  railroads,  or  to  divide  between 
them  the  aggregate  or  net  proceeds  or  earnings  of  such 
railroads  or  any  portion  thereof.  V  10  This  anti-pooling 
clause  was  one  of  the  most  earnestly  debated  provisions 
of  the  Act,  and  its  repeal  is  now  very  generally  urged. 

DISCRIMINATORY  PRACTICES 

Equal  charges  were  required  for  like  and  contempo- 
raneous services  rendered  to  different  persons  under 
substantially  similar  circumstances  and  conditions;  and 
the  giving  of  any  undue  or  unreasonable  preference  or 
advantage  to  any  person,  concern,  locality,  or  kind  of 
traffic  was  prohibited.  Each  railway  was  also  required 
to  interchange  traffic  with  connecting  lines  without  dis- 
criminating between  them  in  the  adjustment  of  rates. 

The  long-and-short-haul  clause  made  it  unlawful  for 
the  railways  "to  charge  or  receive  any  greater  compen- 
sation in  the  aggregate  for  the  transportation  of  passen- 
gers or  of  like  kind  of  property,  under  substantially  sim- 
ilar circumstances  and  conditions,  for  a  shorter  than  for 
a  longer  distance  over  the  same  line,  in  the  same  direc- 
tion, the  shorter  being  included  within  the  longer  dis- 
tance. ' '  It  was  provided,  however,  in  this  fourth  section, 
that  the  Commission  might  in  its  discretion  relieve  any 
carrier  of  the  operation  of  the  clause  to  such  extent  as 
it  might  deem  advisable.  The  carriage  of  freight  from 
the  point  of  shipment  to  the  point  of  destination  was  to 

10  Sec.  5. 


196  Railway  Regulation 

be  regarded  as  one  haul,  unless  stoppage  was  made  in 
good  faith  for  some  necessary  purpose.  This  provision 
was  intended  to  prevent  interruptions  in  the  continuous 
carriage  of  freight,  such  as  might  be  resorted  to  for  the 
purpose  of  making  a  through  haul  appear  to  be  two  or 
more  local  hauls.  Finally  certain  classes  of  persons  and 
of  traffic  were  enumerated  to  which  reduced  rates  or  free 
transportation  might  be  granted.11 

Certain  provisions  of  the  Act  were  intended  to  aid, 
indirectly,  in  accomplishing  its  main  purposes  of  estab- 
lishing reasonable  rates  and  preventing  discriminatory 
practices.  Among  these  are  the  provisions  dealing  with 
rate  publicity  and  the  general  investigating  powers  of 
the  Commission. 

PUBLICITY  OF  KATES 

Each  carrier  was  to  print  and  keep  open  to  public 
inspection  schedules  of  its  rates  and  fares,  these  sched- 
ules to  be  posted  in  two  conspicuous  places  in  freight  and 
passenger  depots,  "in  such  form  that  they  shall  be  acces- 
sible to  the  public  and  can  be  conveniently  inspected/' 
Ten  days7  public  notice  of  an  advance  in  rates  was  re- 
quired, and,  by  an  amendment  passed  in  1889,12  three 
days'  notice  of  a  reduction.  Railways  were  compelled 
to  file  copies  of  their  published  schedules  with  the  Com- 
mission, and  were  forbidden  to  charge  or  receive  a 
greater  or  less  compensation  for  any  service  than  that 
specified  in  these  schedules. 

Joint  tariffs  were  also  to  be  filed  with  the  Commission, 
which  was  authorized  to  require  such  publication  of  them 

n  Sees.  2,  3,  4,  7,  and  22. 

12  Certain  minor  changes  in  the  original  Act  to  Eegulate  Commerce  were 
made  in  1889.  These  are  treated  here  in  connection  with  the  original  Act, 
and  not  separately,  as  are  the  more  important  amendments. 


Federal  Regulation  197 

as  it  deemed  wise.  The  amendment  of  1889  provided  for 
ten  days'  notice  of  an  advance  and  three  days'  notice  of 
a  reduction  in  joint  rates;  it  forbade  carriers  to  depart 
from  them;  and  it  authorized  the  Commission  to  pre- 
scribe the  form  in  which  all  schedules  should  be  prepared 
and  arranged  for  public  inspection.13 

INVESTIGATING  POWEBS  OF  COMMISSION 

As  an  investigating  body  the  Commission  was  vested 
with  power  to  inquire  into  the  management  of  the  busi- 
ness of  all  common  carriers  subject  to  the  Act,  and  to 
require  by  subpoena  the  presence  and  testimony  of  wit- 
nesses and  the  production  of  all  books,  papers,  tariffs, 
contracts,  agreements,  and  documents  relating  to  the  mat- 
ter under  investigation.  In  case  of  disobedience  to  a 
subpoena,  the  Commission  was  authorized  to  appeal  to 
a  federal  court,  which  was  empowered,  though  not  re- 
quired, to  order  compliance  with  it.  Evidence  required 
to  be  given  in  any  proceeding  before  the  Commission 
could  not  be  used  against  the  witness  in  the  trial  of  any 
criminal  suit  arising  out  of  this  proceeding.14  The  Com- 
mission was  empowered  to  institute  any  inquiry  on  its 
own  motion  in  any  part  of  the  country.  Furthermore, 

is  Sec.  6. 

14  On  February  11,  1893,  a  Compulsory  Testimony  Act  was  passed  which 
provided  that  in  any  cause  or  proceeding,  criminal  or  otherwise,  based  upon 
or  growing  out  of  alleged  violations  of  the  Act  to  Eegulate  Commerce,  no 
person  shall  be  excused  from  testifying  on  the  ground  that  such  testimony 
may  tend  to  criminate  him,  but  no  person  so  testifying  shall  be  prosecuted 
for,  or  on  account  of,  any  transaction,  matter,  or  thing  concerning  which  he 
may  testify  or  produce  evidence,  documentary  or  otherwise,  in  any  such  case 
or  proceeding.  On  June  30,  1906,  a  Supplementary  Act  was  passed,  pro- 
viding that  immunity  shall  extend  only  to  a  natural  person  who,  in  obedience 
to  a  subpoena,  gives  testimony  or  produces  documentary  or  other  evidence 
under  oath. 


198  Railway  Regulation 

the  Commission  was  authorized  to  require  annual  reports 
from  all  carriers,  determining  the  form  of  these  reports, 
and  to  establish  a  uniform  system  of  accounts,  prescrib- 
ing the  manner  in  which  such  accounts  shall  be  kept.15 

The  remainder  of  the  Act  dealt  with  questions  of  en- 
forcement, indicating  the  remedies  available  for  the 
injured  shipper  and  the  penalties  imposed  upon  the 
offending  carrier,  and  prescribing  the  practice  and  pro- 
cedure to  be  followed  upon  complaint  and  in  the  execu- 
tion of  the  orders  of  the  Commission. 

REMEDIES  AND  PENALTIES 

It  was  provided  that  damage  suits  might  be  brought 
by  persons  injured  by  violations  of  the  Act  as  private 
remedies,  and  criminal  penalties  were  prescribed  as  an 
aid  to  the  public  enforcement  of  the  law.  Any  common 
carrier,  or  whenever  such  common  carrier  was  a  corpora- 
tion, any  director  or  officer  thereof,  or  any  receiver, 
trustee,  lessee,  agent,  or  person  acting  for  or  employed 
by  such  corporation,  who  wilfully  violated  or  ignored  the 
provisions  of  the  Act,  or  who  aided  or  abetted  such 
deed,  was  to  be  punished  by  a  fine  of  not  more  than  five 
thousand  dollars  for  each  offense.  By  the  amendment 
of  1889,  persons  guilty  of  the  special  violation  involved 
in  discrimination  were  to  be  fined  as  just  indicated,  or 
imprisoned  for  a  term  not  exceeding  two  years,  or  sub- 
jected to  both  penalties  at  the  discretion  of  the  court.16 

PBOCEDUBE  UPON   COMPLAINT 

Persons,  firms,  corporations,  business  associations,  and 
the  like,  as  well  as  local  governments  and  state  railroad 

IB  Sees.  12,  13,  19,  and  20. 
is  Sees.  8,  9,  10,  and  23. 


Federal  Regulation  199 

commissions,  were  privileged  to  bring  complaints  against 
carriers  ignoring  or  violating  the  Act.  If  the  carriers 
did  not  make  reparation  for  the  alleged  injury,  or  if 
there  appeared  reasonable  ground  for  an  investigation, 
the  Commission  was  authorized  to  investigate  the  com- 
plaint in  such  manner  and  by  such  means  as  it  should 
deem  proper ;  and  it  was  expressly  provided  that  no  com- 
plaint should  be  dismissed  because  of  the  absence  of 
direct  damage  to  the  complainant. 

Proceedings  before  the  Commission  were  to  be  con- 
ducted in  such  manner  as  would  "best  conduce  to  the 
proper  dispatch  of  business  and  to  the  ends  of  justice. ' ' 
The  Commission  was  authorized  to  establish  general 
rules  for  the  regulation  of  its  proceedings,  including 
forms  of  notice  and  the  service  thereof,  which  were  to 
"conform  as  nearly  as  may  be  to  those  in  use  in  the 
courts  of  the  United  States."  Upon  completing  the  in- 
vestigation of  any  complaint,  it  was  the  duty  of  the  Com- 
mission to  prepare  a  written  report,  a  copy  of  which  was 
to  be  furnished  to  each  party  involved.  The  findings 
of  fact  in  such  reports  were  in  all  judicial  proceedings  to 
"be  deemed  prima  facie  evidence  as  to  each  and  every 
fact  found. "  If  the  investigation  disclosed  any  viola- 
tion of  law,  the  Commission  was  to  serve,  with  its  report, 
a  notice  to  the  offending  carrier  to  desist  from  such  vio- 
lation, and  was  empowered  to  require  the  carrier  to  make 
reparation  to  any  person  or  persons  injured  by  its 
wrongful  act.17 

ENFOKCEMENT 

The  proceedings  for  enforcing  the  orders  thus  issued 
by  the  Commission,  in  case  of  disobedience  by  the  rail- 

17  Sees.  13,  14,  15,  and  17. 


200  Railway  Regulation 

ways,  were  as  follows.18  If  the  nature  of  the  case  was 
not  such  as  to  require  a  trial  by  jury  under  the  seventh 
amendment  to  the  federal  Constitution,  the  Commission 
or  any  person  interested  in  its  decision  was  authorized 
to  apply  to  the  proper  federal  circuit  court  for  an  en- 
forcing order.  The  court  was  to  "hear  and  determine 
the  matter  speedily  as  a  court  of  equity,  and  without  the 
formal  pleadings  and  proceedings  applicable  to  ordinary 
suits  in  equity,  but  in  such  manner  as  to  do  justice  in  the 
premises/'  If  it  appeared  that  a  lawful  order  of  the 
Commission  had  been  violated,  it  was  to  be  in  the  power 
of  the  court  to  issue  a  writ  of  injunction  or  other  proper 
process  enjoining  obedience  to  the  order.  Punishment 
for  contempt  of  court  arising  out  of  the  violation  of  such 
an  injunction  was  to  consist  of  a  fine  of  five  hundred 
dollars  per  day  for  each  person  participating  in  the 
transgression.  If  the  controversy  was  such  as  to  demand 
a  trial  by  jury,  any  interested  person  was  authorized  to 
apply  to  the  proper  circuit  court,  which  was  to  summon 
a  jury  and  hear  the  proceedings.  If  the  parties  involved 
agreed  to  waive  a  jury,  the  federal  judge  was  himself  to 
try  the  issues  and  render  judgment.19  Appeal  lay  from 
the  lower  federal  courts  to  the  Supreme  Court  of  the 
United  States.20 

is  As  amended  in  1889. 

is  See.  16. 

20  On  February  11,  1903,  the  Expediting  Act  was  pasied.  It  provided 
that  in  any  equity  suit  in  a  circuit  court,  arising  under  the  Act  to  Eegulate 
Commerce,  the  Anti-Trust  Act,  or  any  other  act  "having  a  like  purpose," 
the  Attorney-General,  if  the  United  States  is  complainant,  may  file  a  certifi- 
cate that  in  his  opinion  the  case  is  of  ' '  general  public  importance. ' '  There- 
upon the  case  must  "be  given  precedence  over  others  and  in  every  way  ex- 
pedited, and  be  assigned  for  hearing  at  the  earliest  practicable  day."  Ap- 
peals lie  only  to  the  Supreme  Court  and  must  be  taken  within  sixty  days. 


Federal  Regulation  201 

THE  ELKINS  ACT 

Such  was  the  Act  upon  the  basis  of  which  the  federal 
system  of  railway  control  was  established  and  upon  which 
in  the  main  it  still  rests.  The  original  Act  has,  however, 
been  considerably  modified  by  subsequent  legislation.  A 
few  minor  amendments,  to  which  reference  has  already 
been  made  in  several  connections,  were  passed  in  1889. 
The  first  important  amendments  to  the  system  of  federal 
regulation  as  a  whole  were  not  enacted  till  1906. 

In  the  meantime,  in  1903,  the  Elkins  Act  was  passed. 
It  was  concerned  almost  exclusively  with  the  problem  of 
discrimination.  It  was  urged  by  the  public  very  largely 
as  an  anti-trust  measure,  on  the  ground  that  industrial 
monopoly  was  being  fostered  and  maintained  through 
the  instrumentality  of  railway  discriminations  and  would 
be  seriously  weakened  if  such  practices  were  effectually 
prevented.  The  railways  welcomed  the  measure,  and  lent 
their  aid  to  its  enactment,  as  a  means  of  conserving  their 
shrinking  revenues.  The  Elkins  Act  strengthened  the 
law  against  discrimination  in  several  important  respects. 

It  provided  that  the  act  of  any  officer,  agent,  or  em- 
ployee of  a  railway  corporation,  within  the  scope  of  his 
employment,  was  to  be  regarded  as  the  act  of  the  cor- 
poration, and  that  for  any  violation  of  the  Act  to  Regu- 
late Commerce  both  the  corporation  and  the  person 
responsible  for  the  deed  were  to  be  subject  to  the  penal- 
ties prescribed  by  law.  Imprisonment  was  abolished  as 
a  penalty,  on  the  ground  that  the  necessary  evidence  for 
the  enforcement  of  the  provisions  against  discrimination 
could  be  more  easily  secured  in  the  absence  of  so  stringent 
a  punishment. 

Departure  from  the  published  schedules  was  made  the 
sole  test  of  discrimination.  The  wilful  failure  of  a  car- 


202  Eaihvay  Regulation 

rier  to  file  and  publish  its  schedules  as  required  by  law 
was  made  punishable  by  a  fine  of  not  less  than  one 
thousand  and  not  more  than  twenty  thousand  dollars; 
and  any  departure  or  offer  to  depart  from  the  rates  and 
charges  stated  in  the  schedules  properly  filed  was  de- 
clared to  be  unlawful  and  likewise  subjected  the  carrier 
to  these  penalties.  Moreover,  the  shipper  receiving  pref- 
erential treatment  as  well  as  the  carrier  granting  it  was 
to  be  regarded  as  guilty  of  unlawful  conduct.  It  was 
declared  to  be  unlawful  for  any  person  or  corporation 
to  solicit,  accept,  or  receive,  as  well  as  to  offer,  grant,  or 
give,  any  rebate,  concession,  or  discrimination,  whereby 
property  shall  by  any  device  whatever  be  transported  at 
a  less  rate  than  that  named  in  the  tariffs  published  and 
filed,  or  whereby  any  other  advantage  is  given  or  dis- 
crimination practiced. 

In  brief,  then,  the  Elkins  Act  made  railway  corpora- 
tions as  well  as  their  officers  and  agents  liable  for  dis- 
criminatory practices;  it  abolished  the  penalty  of  im- 
prisonment; it  declared  the  published  tariffs  to  be  the 
standards  of  fair  rates  and  provided  that  departure  from 
these  published  tariffs  was  to  constitute  the  conclusive 
test  of  discrimination ;  and  it  made  the  shipper  as  well  as 
the  carrier  subject  to  the  penalties  imposed  for  a  violation 
of  the  provisions  against  discriminatory  practices. 

THE  HEPBUEN  ACT 

The  first  important  changes  in  the  Act  to  Eegulate 
Commerce  were  adopted  on  June  29,  1906,  by  the  enact- 
ment of  the  Hepburn  amendments.  The  Hepburn  Act 
aimed  to  strengthen  the  entire  system  of  federal  control, 
both  by  supplementing  the  provisions  of  the  original 


Federal  Regulation  203 

Act,  in  those  respects  in  which  changed  conditions  made 
necessary  the  extension  of  federal  authority,  and  by 
re-establishing  the  effectiveness  of  those  provisions  which 
had  been  weakened  or  nullified  through  judicial  inter- 
pretation. These  amendments  mark  the  rejuvenation  of 
the  Interstate  Commerce  Commission,  and  from  1906 
dates  the  permanent  establishment  of  comprehensive  and 
thorough-going  administrative  control  of  railways  in  the 
United  States.  We  will  proceed  to  a  brief  analysis  of  -the 
main  provisions  of  the  Hepburn  Act  and  a  consideration 
of  their  purposes. 


The  scope  of  the  Act  to  Eegulate  Commerce  and  the 
jurisdiction  of  the  Interstate  Commerce  Commission  were 
extended  to  include  express  companies,  sleeping-car  com- 
panies, and  pipe-lines  used  in  the  transportation  of  oil  or 
any  other  commodity  except  water  or  gas.  The  term  t  i  rail- 
road "  was  declared  to  embrace  switches,  spurs,  tracks, 
terminal  facilities  of  every  kind,  freight  depots,  yards, 
and  grounds.  The  term  "transportation"  was  defined  so 
as  to  include  cars  and  other  vehicles,  all  instrumentalities 
and  facilities  of  shipment  or  carriage  irrespective  of 
ownership  or  contract,  and  "all  services  in  connection 
with  the  receipt,  delivery,  elevation,  and  transfer  in 
transit,  ventilation,  refrigeration  or  icing,  storage,  and 
handling  of  property  transported. "  Furthermore,  it 
was  made  the  duty  of  all  carriers  subject  to  the  Act  to 
provide  such  transportation  facilities  upon  reasonable  re- 
quest and  to  make  them  available  at  just  and  reasonable 
rates. 


204  Railway  Regulation 

GRANTS  OF  AUTHORITY  OVEE  DISCRIMINATORY  PRACTICES 

In  spite  of  the  substantial  strengthening  of  the  law 
against  discrimination  which  resulted  from  the  enforce- 
ment of  the  Elkins  Act  of  1903,  the  granting  and  accepting 
of  rebates  and  the  resort  to  other  discriminatory  prac- 
tices had  not  entirely  ceased  when  the  Senate  Committee 
was  investigating  the  railroad  situation  in  1906  and  the 
Hepburn  amendments  were  under  consideration.  Accord- 
ingly, additional  grants  of  power  were  vested  in  the  Inter- 
state Commerce  Commission  calculated  to  increase  in 
effectiveness  its  authority  over  discriminatory  practices. 
This  further  strengthening  of  the  law  against  discrim- 
ination was  secured  indirectly,  in  large  measure,  through 
the  extension  of  the  Commission's  jurisdiction,  indicated 
above,  as  well  as  through  the  enactment  of  new  legislative 
provisions  directly  aimed  at  the  elimination  of  unjust 
preferential  treatment  by  the  railways. 

The  extended  scope  of  the  Act  to  Eegulate  Commerce, 
resulting  from  the  express  inclusion  of  pipe  lines  and 
sleeping-car  companies  within  the  Commission's  jurisdic- 
tion and  from  the  more  precise  and  comprehensive  defini- 
tion of  the  terms  " railroad"  and  "transportation," 
enabled  the  Interstate  Commerce  Commission  to  reach 
more  successfully  the  Standard  Oil  monopoly  which  had 
been  built  up  to  such  a  large  extent  through  the  instru- 
mentality of  railway  rebates  and  by  the  aid  of  its  pipe 
lines,  and  it  helped  the  Commission  to  prevent  more 
effectively  certain  of  the  modern  forms  of  railway  dis- 
crimination, particularly  those  practiced  through  the 
operation  of  private  car  lines  and  the  so-called  "indus- 
trial railroads." 

Private-car  lines  came  under  the  control  of  the  Com- 
mission because  of  the  specific  mention  of  sleeping-car 


Federal  Regulation  205 

companies  and  the  inclusion,  in  the  jurisdictional  section 
of  the  Act,  of  all  instrumentalities  and  facilities  of  ship- 
ment or  carriage,  irrespective  of  ownership  or  contract. 
Moreover,  the  Commission  was  given  authority  over  all 
services  performed  by  private-car  companies;  and  the 
separate  publication  of  terminal,  storage,  and  icing 
charges,  as  well  as  those  for  any  other  privileges  or 
facilities,  was  expressly  provided  for. 

The  industrial  railroads  or  tap  lines  came  under^the 
control  of  the  Commission  because  the  Act  to  Eegulate 
Commerce  was  made  to  apply  to  switches,  spurs,  tracks, 
and  terminal  facilities  of  every  kind.  The  Commission 
was  empowered  to  establish  through  routes  and  maximum 
joint  rates,  whenever  the  carriers  neglect  to  do  so,  and 
to  fix  reasonable  switching  charges  and  make  proper 
apportionment  of  through  rates.  The  authority  of  the 
Commission  to  establish  reasonable  maximum  charges 
to  be  paid  by  carriers  to  any  shipper  who  directly  or 
indirectly  renders  any  service  in  connection  with  the 
transportation  of  his  goods  was  likewise  aimed,  in  part 
at  least,  at  the  special  treatment  secured  by  favored 
shippers  through  the  industrial  railroads. 

Moreover,  it  was  expressly  made  the  duty  of  carriers 
to  construct  switch  connections  under  certain  conditions, 
and  authority  was  vested  in  the  Commission  to  order 
such  switch  connections.  The  conditions  under  which 
this  duty  becomes  operative  were  set  forth  substantially 
as  follows:  that  upon  application  of  any  lateral  branch 
line  of  railroad,  or  of  any  shipper  tendering  interstate 
traffic  for  transportation,  common  carriers  must  con- 
struct, maintain,  and  operate  upon  reasonable  terms  a 
switch  connection  with  any  such  lateral  branch  line  of 
railroad,  or  private  side  track  which  may  be  constructed 
to  connect  with  its  railroad,  where  such  connection  is 


206  Railway  Regulation 

reasonably  practicable  and  can  be  put  in  with  safety  and 
will  furnish  sufficient  business  to  justify  the  construction 
and  maintenance  of  the  same,  and  they  must  furnish  cars 
for  the  movement  of  such  traffic  to  the  best  of  their  ability 
without  discrimination  in  favor  of,  or  against,  any  such 
shipper. 

The  ownership  of  industrial  enterprises  by  railway 
corporations  and  the  vital  concern  of  such  railways 
in  the  commercial  success  of  these  enterprises  have 
resulted  in  recent  years  in  another  indirect  form  of  rail- 
way discrimination,  for  the  successful  elimination  of 
which,  existing  law,  in  1906,  was  inadequate.  The  nature 
of  the  abuse  has  been  concisely  described  by  Professor 
Dixon  as  follows : 

Another  serious  and  elusive  form  of  discrimination  has  been 
practiced  with  special  success  by  the  coal  roads.  By  virtue  of 
being  owners  of  coal  mines  and  transporters  of  their  own 
products,  as  well  as  that  of  independent  operators,  they  have 
been  enabled  so  to  manipulate  their  books  that  it  has  been 
impossible  for  either  the  Commission  or  the  courts  to  decide 
whether  the  advantage  which  they  enjoyed  over  independent 
shippers  should  be  regarded  as  a  discrimination  granted  to  them- 
selves as  carriers  or  a  loss  suffered  by  them  as  producers.  The 
extraordinary  situation  revealed  in  the  affairs  of  the  Pennsyl- 
vania Railroad  by  the  investigation  of  the  Interstate  Commerce 
Commission  while  the  rate  bill  was  under  discussion  in  the 
Senate,  combined  with  the  sentiment  fostered  by  long-continued 
troubles  in  the  coal  fields,  resulted  in  the  incorporation  of  a 
radical  clause.  .  .  .21 

This  situation  led  to  the  enactment  of  the  so-called 
"commodities  clause "  of  the  Hepburn  Act,  which  sought 
to  separate  the  business  of  transportation  from  ordinary 

21  Frank  H.  Dixon,  ' '  The  Interstate  Commerce  Act  as  Amended  in 
1906,"  Quarterly  Journal  of  Economics,  1906,  22-51. 


Federal  Regulation  207 

commercial  and  industrial  enterprise.  By  the  terms  of 
this  clause  it  was  provided  that  after  May  1, 1908,  it  would 
be  unlawful  for  any  railroad  company  to  transport  in 
interstate  commerce  any  commodity,  other  than  timber 
or  the  manufactured  products  thereof,  mined,  manufac- 
tured, or  produced  by  it  or  under  its  authority,  or  which 
it  may  own  in  whole  or  in  part,  or  in  which  it  may  have 
any  interest  direct  or  indirect,  except  such  articles  as  are 
necessary  and  intended  for  its  use  as  a  common  carrier. 

Under  this  commodities  clause  persistent  and  strenu- 
ous action  has  been  taken  by  the  federal  government  to 
bring  about  a  relinquishment  of  their  coal  holdings  by 
the  so-called  "coal  roads, "  especially  in  the  anthracite 
coal  regions  of  Pennsylvania.  Owing  to  the  intricacies 
of  corporate  organization  and  the  complexities  of  inter- 
corporate relationships,  complete  success  in  bringing 
about  a  distinct  separation  between  these  railways  as 
carriers  and  as  shippers  has  not  yet  been  attained,  al- 
though more  than  seven  years  have  now  elapsed  since 
the  date  fixed  from  which  the  commodities  clause  was  to 
operate.22 

The  remaining  provisions  of  the  Hepburn  Act  bearing 
directly  upon  the  problem  of  discrimination  can  be  very 
briefly  summarized.  The  penalty  of  imprisonment  (for  a 
term  not  exceeding  two  years),  which  had  been  removed 
by  the  Elkins  Act,  was  now  restored,  and  was  specifically 
made  applicable  to  shippers  as  well  as  to  agents  or  officers 
of  carriers  guilty  of  discrimination.  Furthermore,  the 

22  An  excellent  discussion  of  the  entire  problem  will  be  found  in  Eliot 
Jones,  The  Anthracite  Coal  Combination  in  the  United  States.  A  summary 
treatment  will  be  found  in  W.  Z.  Bipley,  Eailroads:  Finance  and  Organiza- 
tion, 534-548.  Ripley,  Eailroads:  Bates  and  Eegulation,  552-5.56,  contains 
a  brief  discussion  of  the  judicial  interpretation  of  the  commodities  clause. 


208  Railway  Regulation 

federal  government  was  given  authority  to  collect  from 
any  shipper,  in  a  civil  suit,  three  times  the  amount  of  all 
rebates  received  by  him  in  any  form  or  through  any 
device  for  a  period  of  six  years  prior  to  the  institution 
of  the  action.  Both  of  these  provisions,  it  is  believed, 
strengthened  the  arm  of  the  government.  Finally,  sub- 
ject to  specified  exceptions,  common  carriers  were 
expressly  forbidden  to  issue  or  give  any  interstate  free 
ticket,  free  pass,  or  free  transportation  for  passengers ; 
and  all  persons,  other  than  those  excepted,  were  forbidden 
to  use  the  same.  The  penalty  for  violation  of  this  provi- 
sion, applicable  alike  to  the  carrier  giving  the  free  trans- 
portation and  the  person  making  use  of  it,  was  declared 
to  be  not  less  than  one  hundred  dollars  nor  more  than 
two  thousand  dollars  for  each  offense.23 

EXPRESS  DELEGATION  OF  KATE-MAKING  POWER 

The  most  important  and  significant  provisions  of  the 
Hepburn  Act  are  those  dealing  with  the  rate-making 
power  of  the  Commission.  By  the  Maximum  Freight 
Eate  Decision,  rendered  in  1897,  the  Interstate  Commerce 
Commission  had  been  shorn  of  its  power  to  prescribe 
rates.24  Its  authority  was  decreed  to  be  limited  to  the 

23  An  elaborate  list  of  exceptions  is  enumerated  in  the  Act.    It  has  been 
summarized  as  follows :     f '  Two  general  classes  of  exceptions  are  made  to 
the  application  of  the  statute.     The  first  class  includes  railroad  employees 
and  their  families,  officials,  railroad  surgeons  and  attorneys,  and  employees 
of  agencies  associated  with  the  railroad  business,  such  as  those  of  the  sleep- 
ing-car, express,   telegraph,   post  office,   customs,  and  immigration   service, 
care-takers  of  live-stock,  and  newsboys  and  baggage  men  on  trains.     The 
second  class  comprises  the  poor  and  unfortunate  classes  and  those  engaged 
in  religious  and  charitable  work. ' ' — Frank  H.  Dixon,  ' '  The  Interstate  Com- 
merce Act  as  Amended  in  1906,"  Quarterly  Journal  of  Economics,  1906, 
22-51. 

24  See  supra,  pp.  91-93. 


Federal  Regulation  209 

right  of  declaring  past  rates  unreasonable  and  unlawful. 
The  authority  of  fixing  rates  for  the  future,  which  it  had 
exercised  for  a  decade,  from  1887  to  1897,  was  denied  to 
the  Commission,  thereby  completely  nullifying  its  rate- 
making  power  and  rendering  its  control  over  railway  rates 
purely  nominal.  The  chief  purpose  of  the  Act  of  1906 
was  to  remedy  this  situation,  and  the  rate  section  of  the 
statute  constitutes  the  great  distinctive  feature  of  the 
legislation. 

The  rate-making  power  was  expressly  delegated,  or 
redelegated,  to  the  Interstate  Commerce  Commission  by 
a  clause  providing  that  the  Commission  is  empowered, 
and  it  is  made  its  duty,  whenever,  after  full  hearing  on 
complaint,  it  is  of  the  opinion  that  any  rates  or  charges 
(or  any  regulations  or  practices  affecting  rates  or 
charges)  are  unjust,  unreasonable,  unjustly  discrimina- 
tory, or  otherwise  in  violation  of  the  Act  to  Regulate 
Commerce,  to  determine  and  prescribe  what  will  be  the 
just  and  reasonable  rates,  charges,  regulations,  and  prac- 
tices to  be  thereafter  observed  and  followed.  The  rates 
and  fares  so  prescribed  are  to  be  enforced  as  the  maxi- 
mum to  be  charged  by  the  railways  against  whom  the 
orders  are  issued.  These  orders  are  to  go  into  effect  in 
not  less  than  thirty  days  and  are  to  remain  in  effect  for 
two  years  or  less,  as  determined  by  the  Commission, 
unless  suspended,  modified,  or  set  aside  by  the  Commis- 
sion or  by  a  court  of  competent  jurisdiction. 

As  already  noted  in  connection  with  the  provisions  on 
discrimination,  the  power  to  establish  through  routes  and 
joint  rates,  and  to  prescribe  the  division  or  apportion- 
ment of  such  rates,  was  likewise  vested  in  the  Commis- 
sion, as  well  as  the  authority  to  fix  the  compensation  to 
be  paid  by  a  carrier  to  shippers  who  render  any  service  or 


210  Railway  Regulation 

furnish  any  instrumentality  used  in  connection  with  the 
transportation  of  their  goods.  Wilful  violation  of  an 
order  of  the  Commission  prescribing  rates  or  charges  was 
made  punishable  by  a  fine  of  five  thousand  dollars  for 
each  offense;  every  distinct  violation,  and  in  case  of  a 
continuing  violation  each  day  thereof,  being  declared  a 
separate  offense.25 

STRICT  SUPERVISION  OF  ACCOUNTING  PRACTICES 

The  provisions  of  the  Hepburn  Act  conferring  upon  the 
Commission  the  power  to  exercise  strict  supervision  of 
railway  accounting  practices  have  served  to  strengthen 
its  authority  over  rates  and  discrimination  and  have 
provided  a  fundamental  basis  for  the  enforcement  of 
the  entire  system  of  federal  control. 

In  addition  to  the  general  power  to  prescribe  a  uniform 
system  of  railway  accounts  vested  in  the  Commission  by 
the  original  Act,  the  Interstate  Commerce  Commission 
was  authorized  to  prescribe  the  forms  of  any  and  all 
accounts,  records,  and  memoranda  kept  by  common  car- 
riers, including  the  accounts,  records,  and  memoranda 
of  the  movement  of  traffic,  as  well  as  of  the  receipts  and 
expenditures  of  money.  Moreover,  it  was  made  unlawful 
for  such  carriers  to  keep  any  other  accounts  or  records 
than  those  prescribed  or  approved  by  the  Commission, 
or  to  alter,  mutilate,  or  destroy  any  accounts  or  records, 
or  to  make  any  false  entry  therein. 

As  a  means  of  executing  these  provisions  the  Com- 

25  In  addition  to  the  above  provisions  as  to  rates,  the  Act  required  thirty 
days'  public  notice  and  thirty  days'  notice  to  the  Commission,  of  all 
advances  and  reductions  in  rates.  This  requirement  was  also  made  applicable 
to  joint  rates.  The  Commission  was  given  authority  to  modify  or  suspend 
these  publicity  provisions  upon  adequate  cause  being  shown. 


Federal  Regulation  211 

mission  was  given  the  right  to  have  access  at  all  times 
to  the  accounts  and  records  of  the  carriers  and  to  employ 
special  agents  or  examiners  who  possess  the  authority, 
under  the  order  of  the  Commission,  to  inspect  all  such 
accounts  and  records.  As  an  aid  toward  the  enforcement 
of  these  accounting  practices,  heavy  penalties  were  im- 
posed in  case  of  violation.  Any  person  wilfully  making 
false  entries,  or  destroying,  mutilating,  or  altering  any 
record,  or  keeping  any  other  accounts  or  records  than 
those  approved  by  the  Commission  was  made  liable  to  a 
fine  of  from  one  thousand  to  five  thousand  dollars,  or 
imprisonment  of  from  one  to  three  years,  or  both.  Any 
examiner  who  divulges  information  gained  in  his  inspec- 
tion except  in  so  far  as  he  is  directed  to  do  so  by  the 
Commission  or  by  a  court  was  also  made  liable  to  a  fine 
of  not  more  than  five  thousand  dollars,  or  imprisonment 
for  a  term  not  exceeding  two  years,  or  both. 

CHANGES  IN  PBOCEDUKE  AND  ENFORCEMENT 

Under  the  original  Act  to  Eegulate  Commerce,  as 
applied  in  practice,  there  were  serious  defects  in  the 
procedure  of  the  Commission  and  in  the  enforcement 
of  the  Commission's  orders  by  the  courts.  In  the  first 
place,  there  were  intolerable  delays  in  the  settlement  of 
railway  rate  disputes,  the  real  termination  of  all  con- 
troversies being  postponed  till  their  final  adjudication  by 
the  Supreme  Court  of  the  United  States,  which  not  infre- 
quently caused  a  delay  of  a  number  of  years.  Little 
relief  for  this  situation  was  secured  through  the  Expedit- 
ing Act  of  1903 26  because  of  the  readiness  of  the  federal 
courts  to  give  independent  consideration  to  the  facts  upon 

2«  See  supra,  p.  200. 


212  Railway  Regulation 

which  the  orders  of  the  Interstate  Commerce  Commission 
were  based,  often  admitting  new  evidence  that  had  been 
purposely  withheld  by  the  defendant  railways  in  the 
original  hearings  before  the  Commission.  Furthermore, 
the  courts  exercised  a  broad  power  of  review,  which  re- 
sulted in  the  substitution  of  judicial  discretion,  in  large 
matters  of  economic  policy,  for  the  more  expert  judgment 
of  the  Interstate  Commerce  Commission. 

These  circumstances  diminished  the  power  and  weak- 
ened the  influence  of  the  Commission.  The  administrative 
body  that  had  apparently  been  created  for  the  purpose 
of  developing  and  enforcing  the  federal  system  of  rail- 
way regulation  came  to  occupy  a  position  distinctly  sub- 
ordinate to  that  of  the  courts  in  the  performance  of  these 
functions;  and  all  investigations  and  hearings  by  the 
Interstate  Commerce  Commission  came  to  be  regarded 
as  mere  preliminary  proceedings  in  the  adjudication  of 
railway  disputes  by  the  federal  courts.  To  remedy  this 
situation,  in  some  measure,  was  the  object  of  the  provi- 
sions of  the  Hepburn  Act  involving  changes  in  procedure 
and  enforcement. 

Under  the  original  Act  the  carriers  were  at  liberty  to 
disregard  an  order  of  the  Commission,  without  incurring 
liability  to  punishment  for  violation,  until  the  Commission 
brought  suit  and  secured  a  decision  of  a  federal  court 
sustaining  its  order.  The  burden  of  taking  measures  to 
make  its  orders  effective  was  thus  thrown  upon  the 
Interstate  Commerce  Commission.  Under  the  Hepburn 
amendments  the  orders  of  the  Commission  become  effect- 
ive on  the  date  specified  by  the  Commission  (being  not 
less  than  thirty  days  from  the  date  of  their  promulgation) 
and  continue  in  operation  for  a  period  not  exceeding  two 


Federal  Regulation  213 

years,  unless  modified  by  the  Commission,  or  suspended, 
or  set  aside,  by  a  court. 

The  necessity  for  action  is  thus  thrown  upon  the  car- 
riers, which  must  obey  the  orders  of  the  Commission  or 
suffer  punishment  for  their  neglect,  until  they  apply  to 
a  court  of  competent  jurisdiction  for  relief.  The  Com- 
mission is  authorized  to  grant  a  rehearing,  for  good  cause, 
after  its  order  has  been  issued,  and  to  reverse  or  modify 
its  original  order  upon  such  rehearing.  Without  special 
permission  of  the  Commission,  however,  a  rehearing  does 
not  operate  to  suspend  the  enforcement  of  the  order.  The 
penalty  of  five  thousand  dollars  which  is  prescribed  for 
each  violation  of  an  order  of  the  Commission  becomes 
operative  from  the  date  specified  by  the  Commission  for 
compliance  with  its  provisions.  Moreover,  it  was  pro- 
vided that  the  circuit  and  district  courts  of  the  United 
States  may,  on  application  of  the  Attorney-General  at 
the  request  of  the  Commission,  issue  writs  of  mandamus 
to  compel  carriers  to  comply  with  the  provisions  of  the 
Act  to  Begulate  Commerce  and  its  amendments. 

The  provisions  of  the  Expediting  Act  were  made  appli- 
cable to  suits  brought  to  annul  orders  of  the  Commission, 
as  well  as  to  all  equity  proceedings  instituted,  as  just 
indicated,  for  the  enforcement  of  the  federal  statutes 
relating  to  common  carriers ;  and  it  was  further  provided 
that  appeals  from  all  decrees  granting  injunctions  in  any 
suit  must  be  taken  within  thirty  days  from  the  issue  of 
such  decrees,  and  that  in  the  Supreme  Court  these  appeals 
must  have  precedence  over  all  other  causes  except  pro- 
ceedings of  a  like  character  and  criminal  cases. 

In  the  matter  of  judicial  review  the  provisions  of 
Hepburn  Act,  on  their  face,  presented  a  vague  compro- 
mise (expressing  the  policy  of  Congress  in  uncertain 


214  Railway  Regulation 

terms)  between  the  demands  of  the  conservative  adher- 
ents of  a  broad  review  by  the  courts  and  the  more  radical 
advocates  of  narrow  review.  The  conservatives  desired 
the  situation  as  it  developed  under  the  original  Act  to  be 
continued,  thereby  retaining  the  most  effective  powers 
of  railway  control  in  the  courts  rather  than  in  the  Com- 
mission. The  radicals  desired  the  right  of  judicial  review 
to  be  limited  to  questions  of  law,  reserving  to  the  courts 
only  the  authority  of  passing  upon  the  constitutionality 
of  the  various  statutory  enactments  and  administrative 
orders  and  the  right  of  restraining  the  Commission  from 
acting  beyond  the  scope  of  the  powers  conferred  upon  it. 
The  result  was  a  compromise,  the  real  meaning  and 
significance  of  which  was  itself  determined  by  subsequent 
judicial  interpretation  and  enforcement. 

Provision  was  made  for  judicial  proceedings  to  enjoin, 
set  aside,  annul,  or  suspend  the  orders  of  the  Commission, 
but  no  direct  or  conclusive  declaration  was  included  as  to 
the  grounds  upon  which  the  courts  were  authorized  to 
review  such  orders.  On  this  basis  it  was  provided  that 
upon  application  for  an  injunction  to  enforce  an  order 
of  the  Commission  (other  than  for  the  payment  of 
money),  the  circuit  court  is  authorized  to  issue  a  writ 
if  it  appears  that  an  order  "regularly  made  and  duly 
served "  has  been  violated.  The  exact  meaning  of  the 
phrase  "regularly  made  and  duly  served"  was  left  for 
judicial  determination.  The  provision,  however,  that  no 
injunction  might  be  issued  restraining  the  enforcement 
of  an  order  of  the  Commission  except  on  a  hearing  after 
five  days'  notice  to  the  Commission  has  afforded  from 
the  outset  a  substantial  protection  against  frivolous  and 
hasty  annulment  of  the  Commission's  orders. 


Federal  Regulation  215 

In  fact,  the  relationship  between  the  Interstate  Com- 
merce Commission  and  the  federal  courts  since  the  enact- 
ment of  the  Hepburn  amendments,  and  particularly  since 
1910,  has  become  greatly  improved.  There  has  been  a 
marked  tendency  on  the  part  of  the  courts  to  recognize 
the  supremacy  of  the  Commission  as  the  deliberately 
selected  instrument  of  federal  railway  regulation,  and 
increasingly  to  manifest  a  disinclination  to  interfere  with 
the  orders  of  the  Commission  on  economic  grounds  or 
considerations  of  public  policy.  Soon  after  the  adoption 
of  the  legislation  of  1906  it  was  said : 

The  fact  that  an  order  of  the  Commission  is  now  effective 
immediately  upon  promulgation,  and  that  the  carrier  must 
either  obey  or  take  steps  at  once  to  prevent  the  accumulation  of 
penalties;  that  a  rehearing  before  the  Commission  is  provided 
for;  that  the  duty  of  the  Circuit  Court  is  now  to  determine  the 
regularity  of  the  order  of  the  Commission;  and  that  no  injunc- 
tion may  issue  suspending  an  order  without  giving  the  Com- 
mission an  opportunity  to  be  heard, — all  show  clearly  that 
Congress  has  intended  to  create  an  efficient  administrative  board 
as  an  arm  of  the  legislative  body.  It  is  perfectly  clear  that  the 
judicial  power  is  expected  to  interfere  only  when  the  order  of 
the  Commission  is  ultra  vires21  or  unconstitutional.28 

This  estimate  of  the  significance  of  the  provisions  of 
the  Hepburn  Act  introducing  changes  in  procedure  and 
enforcement  has  been  amply  justified  by  subsequent 
events.  The  courts,  through  their  own  interpretation  of 
the  legislative  provisions,  have  unmistakably  thrown  their 
weight  on  the  side  of  a  narrow  judicial  review  of  the 
orders  of  the  Interstate  Commerce  Commission. 

27  That  is,  beyond  the  scope  of  the  powers  conferred  upon  it. 

28  Frank   H.    Dixon,    ' '  The   Interstate   Commerce  Act   as   Amended  in 
1906,"  Quarterly  Journal  of  Economics,  1906,  22-51. 


216  Railway  Regulation 

THE  MANN-ELKINS  ACT 

The  Mann-Elkins  Act  of  June  18,  1910,  introduced  the 
final  important  amendatory  and  supplementary  provi- 
sions to  the  Act  to  Regulate  Commerce.  The  Commerce 
Court,  which  was  established  by  this  legislation  as  a 
means  of  further  expediting  the  adjudication  of  railway 
disputes  and  of  further  improving  the  relationship  be- 
tween the  Interstate  Commerce  Commission  and  the 
courts,  has  since  been  abolished  and  hence  possesses  at 
this  time  a  mere  historical  interest.  Our  discussion  of 
the  Mann-Elkins  Act,  therefore,  will  be  limited  to  a  very 
brief  consideration  of  its  other  important  provisions — 
dealing  primarily  with  the  extension  of  the  Commission's 
jurisdiction,  the  suspension  of  rate  advances,  and  the  new 
long-and-short-haul  clause. 

FURTHER  EXTENSION   OF  THE  COMMISSION'S   JURISDICTION 

The  application  of  the  Act  to  Regulate  Commerce  and 
the  jurisdiction  of  the  Interstate  Commerce  Commission 
were  further  extended  to  telephone  and  telegraph  com- 
panies, whether  operated  by  wire  or  wireless,  and  to 
cable  lines,  engaged  in  sending  messages  from  one  state, 
territory,  or  district  of  the  United  States  to  any  other 
state,  territory,  or  district  of  the  United  States  or  to  any 
foreign  country.  It  was  specifically  added  that  the  pro- 
visions of  the  Act  are  not  to  apply  to  the  transmission 
of  messages  by  telephone,  telegraph,  or  cable  wholly 
within  one  state  and  not  transmitted  to  or  from  a  foreign 
country  from  or  to  any  state  or  territory.  Those  engaged 
in  the  transportation  of  intelligence  by  electricity  were 
thus  declared  to  be  common  carriers,  and  all  of  the  more 


Federal  Regulation  217 

important  interstate  utilities  were  thereby  brought  under 
the  control  of  the  federal  government.29 

SUSPENSION  OF  KATE  ADVANCES 

The  rate-making  powers  of  the  Interstate  Commerce 
Commission,  expressly  delegated  by  Congress  in  1906 
and  promptly  exercised  by  the  Commission,  were  further 
augmented  in  the  legislation  of  1910  by  vesting  in  the 
Commission  the  authority  to  suspend  rate  advances. 
When  new  rates,  regulations,  practices,  or  classifications 
are  filed  with  the  Commission,  it  is  authorized,  either  on 
complaint  or  on  its  own  motion,  to  enter  upon  an  in- 
vestigation as  to  their  reasonableness,  and,  pending  such 
investigation,  to  suspend  their  operation  for  a  period  not 
exceeding  one  hundred  and  twenty  days  beyond  the  time 
when  such  rates,  regulations,  practices,  or  classifications 
would  otherwise  go  into  effect.  Moreover,  if  the  Com- 
mission's hearing  and  investigation  cannot  be  concluded 
within  the  original  period  of  suspension  (that  is,  within 
one  hundred  and  twenty  days),  it  is  authorized  to  extend 
the  time  of  suspension  for  a  further  period  not  exceeding 
six  months.  In  all  such  rate  advances,  the  burden  of 
proof  to  show  that  the  increased  rates  or  proposed  in- 
creased rates  are  just  and  reasonable  is  placed  upon  the 
common  carrier.  Under  these  provisions  of  the  Mann- 
Elkins  Act  the  notable  rate  advance  cases  of  1910  and 

29  The  first  section  of  the  Act  was  also  amended  by  adding  the  provision 
that  it  is  the  duty  of  common  carriers  to  establish  and  observe  just  and 
reasonable  classifications,  and  rules  and  regulations  affecting  rates,  the  issu- 
ance of  tickets,  receipts,  bills  of  lading,  and  the  handling  of  freight  and 
baggage.  Prior  to  the  passage  of  the  Mann-Elkins  Act  the  Interstate  Com- 
merce Commission  had  been  granted  no  express  authority  over  classifica- 
tions, though  in  practice  it  had  uniformly  exercised  such  authority  as  part 
of  the  rate-making  power. 


218  Railway  Regulation 

of  1913  were  heard  and  decided,  as  well  as  the  more  recent 
petitions  of  the  railways  arising  from  the  commercial 
and  industrial  readjustments  incident  to  the  European 
war  of  1914.30 

THE  NEW  LONG-AND-SHOKT-HAUL  CLAUSE 

We  saw  that  the  effectiveness  of  the  original  fourth 
section  of  the  Act  was  destroyed  by  judicial  interpreta- 
tion.31 A  lower  rate  for  a  longer  than  for  a  shorter  haul 
under  substantially  similar  circumstances  and  conditions 
had  been  prohibited;  and  the  Commission  for  a  period 
of  ten  years  had  permitted  carriers  to  depart  from  the 
long-and-short-haul  principle  only  if  water  competition, 
or  competition  of  railways  not  subject  to  the  Act  to 
Regulate  Commerce,  existed  at  the  more  distant  point. 
In  1897,  however,  by  the  decision  of  the  Supreme  Court 
in  the  Alabama  Midland  Case,  it  was  held  that  the  mere 
existence  of  railway  competition  (whether  or  not  the 
railways  involved  were  subject  to  federal  control)  con- 
stituted such  dissimilarity  of  circumstances  and  condi- 
tions as  to  remove  the  case  from  the  prohibition  of  the 
fourth  section.  From  1897  to  1910,  therefore,  the  rail- 
ways were  virtually  free  to  disregard  the  long-and-short- 

30  The  legislation  of  1910  also  included  two  minor  rate  provisions  which 
may  be  here  mentioned.  (1)  The  Commission  was  authorized  to  fix  rates 
after  a  hearing  held  without  complaint,  on  its  own  motion,  being  empow- 
ered, when  it  has  instituted  an  inquiry  on  its  own  motion,  to  proceed  with 
the  same  and  issue  such  orders  as  it  may  deem  necessary,  just  as  if  com- 
plaint had  been  previously  made.  (2)  It  was  provided  that,  upon  written 
request  to  any  station  agent,  a  carrier  must  give  within  a  reasonable  time 
a  written  statement  as  to  the  rate  or  charge  applicable  to  a  described  ship- 
ment, a  penalty  of  two  hundred  and  fifty  dollars  being  imposed  upon  the 
carrier  if  damage  results  from  a  refusal  to  submit  such  statement  or  from 
any  error  therein. 

si  See  supra,  pp.  134-137. 


Federal  Regulation  219 

haul  principle  at  will ;  and  the  authority  of  the  Interstate 
Commerce  Commission  over  this  important  and  per- 
sistent form  of  local  discrimination  was  judicially 
nullified. 

The  amended  long-and- short -haul  clause  of  the  Mann- 
Elkins  Act,  then,  constituted  one  of  the  most  significant 
provisions  of  the  1910  legislation.  The  phrase  "under 
substantially  similar  circumstances  and  conditions "  was 
entirely  stricken  from  the  section.  Common  carriers  were 
thus  prohibited  to  charge  or  receive  any  greater  com- 
pensation for  the  transportation  of  passengers,  or  of  a 
like  kind  of  property,  for  a  shorter  than  for  a  longer 
distance  over  the  same  line  or  route  in  the  same  direction, 
the  shorter  being  included  within  the  longer  distance, 
under  any  circumstances,  without  the  prior  authorization 
of  the  Interstate  Commerce  Commission.  The  chief 
source  of  defect  in  the  original  fourth  section  being 
removed,  the  long-and-short-haul  clause  was  entirely 
rehabilitated.  Under  this  new  clause  the  so-called 
intermountain  rate  cases,  involving  a  comprehensive 
readjustment  of  transcontinental  freight  rates,  were 
heard  and  decided,  and  the  Interstate  Commerce  Com- 
mission is  proceeding  gradually  to  remove  the  many 
anomalies  of  the  southern  rate  situation.32 

CONCLUSION 

We  have  traced  the  development  of  the  American  sys- 
tem of  state  and  federal  control,  and  have  examined  the 

32  Two  other  changes  in  the  fourth  section,  may  be  here  noted:  (1) 
Common  carriers  were  prohibited  to  charge  a  greater  compensation  as  a 
through  rate  than  the  aggregate  of  the  intermediate  rates  over  the  same 
line  or  route;  (2)  railroads  reducing  rates  because  of  water  competition 
were  prohibited  to  raise  them  again  unless,  after  a  hearing  by  the  Inter- 
state Commerce  Commission,  it  is  found  that  the  proposed  increase  is  justi- 
fied by  changed  conditions  other  than  the  elimination  of  water  competition. 


220  Railway  Regulation 

various  elements  which  compose  its  structure.  In  the 
course  of  its  growth,  the  principles  and  practices  of  rail- 
way regulation  have  gradually  accommodated  themselves 
to  our  ever-changing  social,  commercial,  and  industrial 
conditions. 

There  emerge,  however,  certain  broad  tangible  results 
which  have  become  permanently  incorporated  in  our 
policy  of  public  control  of  railway  enterprise.  They  are 
grounded  in  the  whole  of  American  railway  experience. 
The  railway  business  is  public  in  character  and  intimately 
concerns  the  general  welfare,  so  that  both  the  right  and 
the  need  of  governmental  control  can  no  longer  be  dis- 
puted. To  a  large  extent,  nevertheless,  the  public 
interest  can  be  secured  only  through  honest  and  willing 
co-operation  between  the  railways  and  the  people.  For 
the  certain  and  adequate  accomplishment  of  the  ends 
in  view,  however,  even  with  the  aid  of  the  mutual  confi- 
dence and  good  will  of  the  public  and  the  public  service 
corporations,  the  expert  and  continuous  supervision  of 
administrative  commissions  is  necessary.  Finally,  since 
the  railway  service  is  national  in  scope  and  influence, 
being  coextensive  with  the  national  development  of 
commerce  and  industry,  the  supremacy  of  the  federal 
government  in  railway  regulation  must  be  vigorously 
safeguarded  and  uniformly  maintained. 


Federal  Regulation  221 

TEST  QUESTIONS 

1.  Trace  the  chief  causes  of  federal  legislation  and  explain 
their  significance. 

2*.  locate  the  general  character  of  federal  regulation, 
explaining  its  main  purposes  and  describing  the  important  pro- 
visions- through  which  these  purposes  are  sought  to  be  accom- 
plished. 

3.  Compare  the  essential  features  of  legislative,   judicial, 
and  administrative  railway  rate  control.     State  the  functions 
of  the  legislature  and  the  courts  in  the  present  system  of  federal 
railway  regulation. 

4.  Describe  the  organization  of  the  Interstate  Commerce 
Commission  and  indicate  the  extent  of  its  jurisdiction  under  the 
original  Act  to  Regulate  Commerce. 

5.  What  were  the  chief  provisions  of  the  Act  to  Regulate 
Commerce  with  regard  to  rate  reasonableness,   discriminatory 
practices,  and  publicity  requirements? 

6.  State  the  important  investigating  powers  of  the  Inter- 
state Commerce  Commission.     What  were  the  main  provisions 
of  the  original  Act  as  to  procedure  and  enforcement? 

7.  Enumerate  the  leading  provisions  of  the  Elkins  Act  of 
1903  and  explain  the  significance  of  each. 

8.  Why  is  it  said  that  the  Hepburn  Amendments  of  1906 
mark  the  rejuvenation  of  the  Interstate  Commerce  Commission  ? 

9.  Describe  the  provisions  of  the  Hepburn  Act  with  regard 
to  discriminatory  practices  and  rate-making  power.    Explain  the 
importance  of  the  provisions  introducing  changes  in  procedure 
and  enforcement  and  indicate  the  nature  of  these  changes. 

10.  Explain  the  character  of  the  powers  vested  in  the  Com- 
mission by  the  1906  legislation  resulting  in  the  strict  supervis- 
ion of  accounting  practices. 

11.  Name  and  describe  the  leading  features  of  the  Mann- 
Elkins  Act  of  1910. 

12.  What  are  the  main  provisions  of  the  fourth  section  as 
amended  by  the  1910  legislation? 

13.  What  three  things  are  fundamentally  essential  for  the 
safeguarding  of  the  public  interest  in  connection  with  railway 
enterprise  ? 

14.  Trace  the  development  of  the  rate-making  powers  of  the 
Interstate  Commerce  Commission. 


222  Railway  Regulation 

15.  State  the  chief  causes  of  the  enactment  of  the  Hepburn 
Amendments  of  1906  and  the  Mann-Elkins  Act  of  1910. 

16.  Enumerate  the  various  utilities  over  which  the  Inter- 
state Commerce  Commission  now  has  jurisdiction. 


NOTE  ON  SOURCE  MATERIAL 

The  publications  of  the  Interstate  Commerce  Commission  con- 
stitute the  most  important  source  material  on  American  railway 
transportation.  In  addition  to  occasional  documents  resulting 
from  special  investigations,  these  publications  consist  of  the  Com- 
mission's  decisions  (thirty-two  volumes  at  the  present  time),  its 
annual  reports  to  Congress,  and  the  Statistics  of  Railways  in 
the  United  States  prepared  each  year  under  its  supervision.  The 
decisions  and  reports  of  the  state  railroad  and  public  service 
commissions  afford  similar  source  material.  The  decisions  of  the 
California,  New  York,  and  Wisconsin  commissions  are  especially 
important.  The  judicial  records  and  decisions  of  important 
cases  coming  before  the  courts,  state  and  federal,  on  appeal  from 
the  orders  of  the  Interstate  Commerce  Commission  and  of  the 
state  commissions  present  the  best  evidence  of  the  relationship 
between  the  legal  and  economic  problems  involved  in  railway 
regulation.  The  Report  of  the  United  States  Industrial  Com- 
mission (1902),  Vols.  IV,  IX,  and  XIX,  contains  a  mass  of 
valuable  material  on  American  railway  conditions  prior  to  1900. 
The  Windom  Committee  investigation  of  1874  (U.  S.)  and  the 
Hepburn  Committee  investigation  of  1878  (N.  Y.),  as  well  as 
the  special  Congressional  hearings  incident  to  the  enactment  of 
the  more  important  federal  laws,  in  1887,  1903,  1906,  and  1910, 
have  made  available  a  large  quantity  of  first-hand  testimony 
covering  the  entire  field  of  railway  economics  and  government 
regulation  of  the  transportation  industries. 


223 


SELECTED  BOOKS  ON  THE  PRINCIPLES  OF  RAILWAY 
ECONOMICS  AND  THE  LAW  AND  DEVELOP- 
MENT OF  RAILWAY  REGULATION 

Acworth,  W.  M.,  The  Elements  of  Railway  Economics  (1905). 

Beale,  J.  H.,  and  Wyman,  Bruce,  The  Law  of  Railroad  Rate 
Regulation  (Revised  edition,  1915). 

Clark,  J.  M.,  Standards  of  Reasonableness  in  Local  Freight  Dis- 
criminations (1909). 

Cleveland,  F.  A.,  and  Powell,  F.  W.,  Railroad  Finance  (1912). 

Cleveland,  F.  A.,  and  Powell,  F.  W.,  Railroad  Promotion  and 
Capitalization  (1909). 

Daggett,  Stuart,  Railroad  Reorganization  (1908). 

Dunn,  S.  O.,  The  American  Transportation  Question  (1912). 

Dunn,  S.  0.,  Government  Ownership  of  Railways  (1914). 

Guyot,   Yves,    Where   and   Why    Government   Ownership   Has 
Failed  (1914). 

Hadley,  A.  T.,  Railroad  Transportation  (1885). 

Haines,  H.  S.,  Problems  in  Railway  Regulation  (1911). 

Hammond,  M.  B.,  Railway  Rate  Theories  of  the  Interstate  Com- 
merce Commission  (1911). 

Haney,  L.   H.,   A   Congressional  History   of  Railways  in  the 
United  States  (1908  and  1909). 

Hooper,  W.  E.,  Railroad  Accounting  (1915). 

Johnson,    E.    R.,    American  Railway    Transportation    (Second 
revised  edition,  1909). 

Johnson,  E.  R.,  and  Huebner,  G.  G.,  Railroad  Traffic  and  Rates 
(1911). 

Judson,  F.  N.,  The  Law  of  Interstate  Commerce  and  Its  Federal 
Regulation  (Second  edition,  1912). 

Knoop,  Douglas,  Outlines  of  Railway  Economics  (1913). 

Lust  and  Merriam,  Digest  of  Decisions   Under  the  Interstate 
Commerce  Act,  1908 — June,  1912. 

224 


Selected  Books  225 

McPherson,  L.  G.,  Railroad  Freight  Rates  (1909). 

Meyer,  B.  H.,  Railway  Legislation  in  the  United  States  (1903). 

Newcomb,  H.  T.,  Railway  Economics  (1898). 

Noyes,  W.  C.,  American  Railroad  Rates  (1905). 

Noyes,  W.  C.,  Intercorporate  Relations  (Second  edition). 

Pierce,  E.  B.,  Digest  of  Decisions  Under  the  Act  to  Regulate 

Commerce,  1887  to  1908. 

Ripley,  W.  Z.,  Railroads:  Rates  and  Regulation  (1912). 
Ripley,  W.  Z.,  Railroads:  Finance  and  Organization  (1915). 
Ripley,  W.  Z.,  Railway  Problems  (Revised  edition,  1913).* 
Sakolski,  A.  M.,  American  Railroad  Economics  (1913). 
Strombeck,  J.  F.,  Principles  of  Freight  Classification. 
Vrooman,  C.  S.,  American  Railway  Problems  (1910). 
Whitten,  R.  H.,  Valuation  of  Public  Service  Corporations  (1912 

and  1914). 

Williams,  S.  C.,  The  Economics  of  Railway  Transport  (1909). 
Wyman,  Bruce,  The  Special  Law  Governing  Public  Service  Cor- 

porations  and  AU  Others  Engaged  in  Public  Employment 

(1911). 


INDEX 


Accounts,  105,  163,  197,  210. 

Act  to  Regulate  Commerce,  56,  58,  90- 

95,  116-18,  132-37,  193-200. 
Actual  cost  as  basis  of  valuation,  104, 

105. 
Administrative    regulation,    44,    90-95, 

99.   100,   142,   143,   152,    153,   191-93. 
Administrative    staff    of    commissions, 

147. 

Advisory  commissions,  152,  153. 
Agreements  to  maintain  rates,  53,  54. 
Alabama  Midland  Case,  135-37,  218. 
Alabama  Railroad  Commission,  166. 
Antecedents  of  the  railway,  29,  30. 
Anti-pooling  clause,  58,  59,  61,  62,  137, 

138,  194,  195. 
Arizona  Corporation  Commission,   155, 

157,  159,   164,   166. 
Arkansas    Railroad    Commission,    159, 

166. 

Baltimore  &  Ohio  .Railroad,  31. 

Basing  point  system,  126. 

Beginnings   of   railway   transportation, 

30-32. 

Beginnings  of  regulation,  42-48. 
Bemis,  E.  W.,  105. 
Breese,  Mr.  Justice,  16. 
Brewer,  Mr.  Justice,  92. 

California  Railroad  Commission,  155, 
157,  159,  164,  167. 

Canals,  30. 

Carload  rates,  81,  82,  84. 

Causes  of  discrimination,  23-25,  112-14. 

Causes  of  federal  regulation,  188-90. 

Causes  of  speculative  railway  construc- 
tion, 39. 

Certificates  of  convenience  and  neces- 
sity, 155,  156. 

Character  of  railway  business,  3-8,  12- 
25, 

Charleston  &  Hamburg  Railroad,  31. 

Cincinnati  Freight  Bureau  Case,  91- 
93,  208. 

Civil  War,  32,  42. 

Claim-department  rebates,   130,  131. 

Classification,  77-80,   119-22. 

Coleman,   W.  C.,  176. 

Colorado   Railroad  Commission,   167. 

Commerce  clause  of  Constitution,  172, 
173,  175-78. 

Commercial  competition,  53,  82. 

Commission  procedure,  149,  198,  211- 
15. 


Commission  regulation,  44,  90-95,  99, 
100,  139-66,  188-220. 

Commodities  clause,  206,  207. 

Commodity  rates,  78. 

Common  carriers,   15-17. 

Compensation  of  commissioners,  146, 
193.  -  - 

Competition,  17-25,  43,  49-62,  82,  137- 
39,  140,  154-56,  189,  194,  195. 

Compulsory  Testimony  Act,  197. 

Conflict  of  state  and  federal  authority, 
165,  166,  172-86. 

Connecticut  Public  Utilities  Commis- 
sion. 155,  167. 

Consolidation,  56,  61. 

Construction  companies,  40,  41. 

Co-operation,  53-62. 

Cost  of  service  in  rate-making,  20-22, 
65-69,  78,  79,  80-82. 

Credit  Mobilier,  41. 

Cullom  Committee  Report,  189. 

Cumberland  Road,  29. 

Dangers  of  regulation,  26,  27. 
Delaware,   145. 

Development  of  railway  mileage,  32,  33. 
Development  of  railway  service,  33-35. 
Development  of  railway  transportation, 

29-35. 

Differentials,  118,  120. 
Discrimination,   23-25,   49,    50,    61,   62, 

112-38,  160,  161,  195,  196,  201,  202, 

204-8,    218,    219. 
Disqualifications    for    membership    in 

commissions,  148,  149. 
Distribution  of  cars,  131. 
Dixon,  F.  H.,  94,  206,  208,  215. 
Dunn,  S.  O.,  65,  72,  119. 

Economic  basis  of  regulation,  17-25. 

Economic  functions  of  transportation, 
4-6. 

Elkins  Act,  133,  134,  201,  202. 

Eminent   domain,    13-15. 

Enforcement  of  commission  laws,  162, 
199,  200,  211-15. 

Erie  Canal,  30. 

Erie  Railroad,  40. 

Establishment  and  change  of  rates,  77- 
83.  87-110,  161,  162,  194,  195,  208- 
10,  217,  218. 

Expediting  Act,  200,  213. 

Express  companies,  151,  193,  203. 

Extent  of  American  railway  interests, 
1-3. 

Extent  of  public  aid  to  railway  con- 
struction, 38. 


227 


228 


Index 


False  billing,  128,   129. 

Federal    regulation,    58-61,    67-69,    71, 

76,  78-80,  90-95,  114,  116-18,  120-22, 

132-38,   176-86,  188-220. 
Federal    versus    state    authority,    165, 

166,   172-86. 
Fifth  Amendment,  172. 
Finance.  11,  39-41,  157,  158. 
Financial  manipulation,  40,  41. 
Florida  Railroad  Commission,  159,  167. 
Forms  of  Competition,  51-53. 
Forms  of  Discrimination,  23-25,  118-32. 
Fourteenth     Amendment,     88,     95-100, 

172. 

Franchise  regulation,  141,  154-57. 
Freight  classification,  77-80,   119-22. 
Fulton,  Robert,  30. 
Functions  of  transportation,  3-8. 


Georgia  Railroad  Commission,  147,  159, 

167 

Granger  cases,  47,  87-90,  95-97. 
Granger  legislation,  44-48,  188. 
Great  Lakes,  194. 

Great  "Northern  Railroad,  61,  107,  178. 
Growth  of  commissions,   150. 
Growth  of  railway  mileage,  32,  33. 
Growth  of  railway  service,  33-35. 


Hadley,  A.  T.,  31,  45,  50,  51,  124. 
Iladley's  Oyster  Case,  124,  125. 
Hammond,  M.  B.,  69,  123. 
Harlan,  Mr.  Justice,  13,  101. 
Hatters'  Furs  Case,  120. 
Hatton,   W.   H.,   13. 
Hepburn   Act,   94,   95,    153,   202-15. 
Hughes,  Mr.  Justice,  108,  182,  186. 

Idaho  Public  Utilities  Commission,  145, 

149,    155,    159,   163,    164,   167. 
Illinois    Public    Utilities    Commission, 

145,    153,    155,    157,    159,    163,    164, 

167. 
Importance  of  railway  transportation, 

1-8. 
Increasing  returns  in  railway  business, 

21,   22,   49-51,   112-14. 
Indeterminate  franchises,  156,  157. 
Indiana    Public     Service    Commission, 

145.   155,   157,  159.   163,   164,  167. 
Indirect  discrimination,  115.  116,  129- 

32. 

Industrial  commission,  52,  54. 
Industrial, railroads,  130,  203.  204-6. 
Ingalls,  M.  E.,  40. 

Intensive  development  of  railway  serv- 
ice, 33-35. 
Interstate    commerce,    165,    166,    174, 

175,  179,  180,   183,  188. 
Interstate   Commerce    Commission,    58- 

61.  67-69,  71.   76,  78-80,   9O-95,   114. 

116-18,   120-22,   132-38,   176-86,   188- 

220. 
Intrastate    commerce,    165,    166,    174, 

175,  179,  180,  183,  190. 
Intraterritorial4'  commerce,  194. 
Investigating   powers    of    commissions, 

153,  154,  163-65,  197,  198,  210,  211, 

217.  218. 
Iowa  Railroad  Commission,  167. 


Johnson,  E.  R.,  67. 

Joint  cost,  20,  21,  72. 

Joint  rates,  205,   196,   197,  209. 

Joint  Traffic  Association  Case,  59,  60. 

Jones.   Eliot,  207. 

Judicial  regulation,  43,  44,   91-93,  95- 

100,  139-41,  135-37,  191-93. 
Judicial  review,  95-100,  191-93.  211-15. 
Jurisdiction    of    commissions,     150-52, 

193.   194,  203,  216,  217. 
Just  discrimination.  116-18. 


Kansas    Public    Utilities    Commission, 

147,  155,   157,   159,   167. 
Kentucky  Railroad  Commission,  167. 

Land  valuation,  106-10. 

Law    against    discrimination.     132-38, 

160,   161,   195,   196,   201,   202,  204-8, 

218,   219. 

Lawful  discrimination,  116-18. 
Legal  basis  of  regulation,  12-17. 
Legal  validity  of  co-operation,  57-62. 
Legislative  regulation,  142,  192. 
Less-than-carload  rates.  81,  82,  84. 
List  of  commissions,  166-69. 
Liverpool   &  Manchester   Railroad,   31. 
Local  aid  to  railway  construction,  36, 

37. 
Local  discrimination,   24,   122-27,   133- 

37,  160,  195,  196,  218,  219. 
Long-and-short-haul      clause,      134-37, 

160,  218,  219. 

Louisiana  Railroad  Commission,  167. 
Louis-ville  &  Nashville  Case,  134. 
Lust,   H.   C.,   100,   194. 


McCarthy,  Charles,  13. 

Maine  Railroad  Commission,  148,  155, 

167. 

Mandatory  commissions,  152,  153. 
Mann-Elkins  Act,   137.   216-19. 
Market  competition,  51-53. 
Market   value    as    basis    of    valuation, 

103,  104. 

Marshall,  Chief  Justice,  173,  175. 
Maryland    Public    Service    Commission, 

155,   159,  167. 
Massachusetts  Gas  and  Electric  Light 

Commission,  159.  167. 
Massachusetts  Public  Service  Commis- 
sion,   145,    147,    148,    152,    155,    156, 

157,   159,  167. 
Mather,   Robert,  174. 
Maximum    Freight    Rate    Case,    91-93, 

208. 

Meade,  E.  S.,  20. 
Methods  of  public  control,  43,  44,  139- 

43,    191-93. 
Meyer,  B.  H.,  3.  4. 
Michigan  Central  Railroad,  36. 
Michigan     Railroad     Commission,     148, 

155,   157,   159,   168. 
Michigan  Southern  Railroad,  35,  36. 
Milling  in  transit,  131. 
Minneapolis  &  St.  Louis  Railroad,  107, 

178. 
Minnesota     Railroad     and     Warehouse 

Commission.  107,  159,  168.  178. 
Minnesota    Rate   Case    (of   1890),    98: 

(of  1913),   107-10,   178-83. 
Mississippi  Railroad  Commission,   168. 


Index 


229 


Missouri  Public  Service  Commission, 
145,  155,  157,  159,  163,  164,  168. 

Monopolistic  character  of  railways, 
17-25. 

Monopolistic  combinations  and  discrim- 
inatory practices,  24,  25,  201. 

Montana  Railroad  and  Public  Service 
Commission,  145,  168. 

Munn  v.  Illinois,  13,  87,  88,  96. 

National  aid  to  railway  construction, 
37,  38. 

National  Civic  Federation,  150. 

National  Pike,  29. 

Nature  of  public  aid  to  railway  con- 
struction, 35,  36. 

Nature  of  railway  business,  3-8,  12-25. 

Nature  of  railway  competition,  17-25, 
49-53. 

Nebraska  Railway  Commission,  159, 
168. 

Nevada  Public  Service  Commission, 
168. 

Nevada  Railroad  Commission,  148,  168. 

New  Hampshire  Public  Service  Com- 
mission, 155,  157,  168. 

New  Jersey  Public  Utilities  Commis- 
sion. 157,  159.  164,  168. 

New  Mexico  Corporation  Commission, 
168. 

New  York  Central   Railroad,   34. 

New  York  Public  Service  Commissions, 
142,  152,  155,  157.  159,  168. 

North  Carolina  Corporation  Commis- 
sion, 168. 

North  Dakota  Railroad  Commission, 
168. 

Northern  Pacific  Railroad,  33,  61,  107, 
178. 

Northern  Securities  Case,  61. 

Number  of  commissioners,  146,  193. 

Number  of  commissions,  150. 

Objects    of    franchise   regulation,    141, 

154. 
Ohio  Public  Utilities  Commission,  145, 

159,  164,  169. 
Oklahoma      Corporation      Commission, 

159.   169. 

Open  discrimination.  115,  116. 
Oregon  Railroad  Commission,  152,  159, 

164.  169. 

Organization  of  commissions,  144-49. 
Oyster  Case,  124,  125. 

Panama  Canal  Act,  193,  194. 

Parmelee.  J.  H..  3. 

Pearline  Case.  121. 

Pearson,  H.  G.,  36. 

Penalties,  164,  165,  198,  202.  208,  211. 

Pennsylvania  Public  Service  Commis- 
sion, 145,  155.  157,  159,  163,  164, 
169. 

Pennsylvania  Railroad,  31,  206. 

Personal  discrimination.  23-25,  127-32. 

Personnel  of  commissions,  144,  145, 
147-49. 

Physical  valuation.   102-10. 

Pipe  lines,  151,  194,  203. 

Political  importance  of  railways,  7,  8, 
33. 


Pooling,  54-56,  58,  62,   137,   138,   194, 

Present  value  as  basis  of  valuation, 
105-10. 

Private  car  lines,  129,  160,  193,  194, 
203-5. 

Problem  of  regulation,  25-27,  219,  220. 

Problems  in  valuation,  106-10. 

Procedure,  149,  198,  211-15. 

Public  aid  to  railway  construction,  12, 
35-38. 

Publicity  requirements  in  rate-making, 
161,  196.  197,  210. 

Purposes  of  public  aid  to  railway  con- 
struction, 35,  36. 

Qualifications  of  commissioners,  147, 
148. 

Railroad  commission  cases,  90,  97. 
Railway  competition,   17-25,  43,  49-62, 

82,     13-39,     140,     154-56,     189,     194, 

195. 

Railway  consolidation,  56,  61. 
Railway  co-operation,  53-62. 
Railway  development,  29-48. 
Railway  discrimination,  23-25,  49,  50, 

61,    62.    112-38,    160,    161,    195,    196, 

201,  202,  204-8,  218.  219. 
Railway  finance,  11.  39-41,  157.  158. 
Railwa-y  rates,  64-110,  158-63,  194,  195, 

196,   197,   208-10.   217.  218. 
Railway  service,  33-35.  162,   163. 
Railways     under     Sherman     Act,     56, 

59-61. 

Rate-making  practice,  77-85. 
Rate    reasonableness,    83-85,    100-110, 

158,  159,  194,  195,  208-10,  217,  218. 
Rebates,  114-16,  129-32. 
Remedies  of  shipper,  198,  199. 
Rhode  Island  Public  Utilities  Commis- 
sion, 169. 
Ripley,    W.   Z..   1,   36,   40,   65,   73,   81, 

127,  189,  207. 
Ruggles  v.  Illinois,  89. 

Safety  of  service,  162,  163,  192. 

Seager,  H.  R.,  5,  62. 

Secret  discrimination,  115,  116,  129-32. 

Security  issues.  11,  39-41,  157.  158. 

Selection  of  commissioners.  145,  193. 

Sherman  Act  and  railways,  56,  59-61. 

Shreveport  Case,  183-86. 

Significance  of  railways,  3-8. 

Sleeping  car  companies.  151,  193,  203. 

Smyth  v.  Ames,  13,  100-2. 

Social  considerations  in  rate-making, 
75,  76. 

Social  importance  of  railways,  7,  8. 

South  Carolina  Railroad  Commission, 
148,  169. 

South  Dakota  Railroad  Commission. 
155,  159,  169. 

Southern  basing  point  system,  126. 

Southern  Pacific  Railroad,  61. 

Speculative  character  of  railway  de- 
velopment, 10-12,  39-41. 

Standard  Oil  Company,  129,  189,  204. 

Standards  of  rate  reasonableness,  100- 
10,  158,  159. 

State  aid  to  railway  construction,  36, 
37. 

State  commissions,   166-69. 


230 


Index 


State  regulation,  42-48,  139-69. 

State    versus    federal    authority,    165, 

166,   172-86. 

Statistics,  1-3,  84,  164,  165. 
Stephenson,  George,  31. 
Subordinate    officials    of    commissions, 

147. 
Suspension  of  rate  advances,  162,  217, 

218. 
Swayze,  F.  J.,  89. 

Tap  lines.  130,  203,  204-6. 

Taussig,  F.  W.,  11.  72. 

Telegraphs  and  telephones,  151,  216. 

Tennessee  Railroad  Commission,  169. 

Tenure  of  commissioners,  146,  193. 

Texas  Railroad  Commission,  157,   159, 

169. 

Theories  of  rate-making,   65-76. 
Through  routes,  205.  209. 
Transcontinental  rate  system.  126. 
Trans-Missouri      Freight      Association 

Case,  59,  60. 

Trunk-line  rate  system,  126. 
Turnpikes,  29. 

TJnderclassiflcation,  128. 
Union  Pacific  Railroad,  33,  38,  61. 
Union  Pacific-Southern  Pacific  merger, 
61. 


United   States   Industrial   Commission, 

52,   54. 
Utah,  145. 

Valuation,  102-10. 

Value  of  service  in  rate-making,  65, 
69-75,  78:80,  81-83. 

Varieties  of  competition  in  transpor- 
tation, 51-53. 

Varieties  of  discriminatory  practices, 
23-25,  118-32. 

Vermont  Public  Service  Commission, 
155,  157,  169. 

Virginia  Corporation  Commission,  148, 
169. 

Wabash   Case,   190. 

Waite,  Chief  Justice,  13,  90,  96,  97. 

Washington  Public  Service  Commis- 
sion, 159,  169. 

West  Virginia  Public  Service  Commis- 
sion, 145,  148,  149,  155,  159,  163, 
169. 

Wnitten,  R.  H.,  103,  104. 

Wicker,  C.  M.,   113.    . 

Windom   Committee  Report,  188. 

Wisconsin  Railroad  Commission,  142, 
143,  148,  149,  152,  154,  155,  156, 
157,  159,  164, 169. 

Wyman,  Bruce,  14,  15. 

Wyoming,  145. 


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4 


/ 


9    1947 


-•  LD 

WAR  14  1961 


RE.        -O 

JANS    1962 


Etc.  CIB.  IS2  3B 


APR  %t    1i 
MAY  12  |j 

?- 


LD  21-50m-l, 


YC  25698 


